Q4 2022 Kite Realty Group Trust Earnings Call
Speaker 2: I'll begin the introductions. Thank you for standing by and welcome to Kite Realty Group Trust Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After this week's presentation, there will be a question and answer session.
Speaker 2: To ask a question during this session, you'll need to press star 11 on your telephone. To remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host with today's program, Brian McCarty, Senior Vice President, Corporate Marketing and Communications. Please go ahead, sir.
Speaker 2: Primary Cardi, you may begin.
Speaker 2: Thank you and good afternoon everyone. Welcome to Cuyote Realtty Group's fourth quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and our subject to inherent risks and uncertainties. Actual results may differ materially from these statements.
Speaker 2: For more information about the factors that can adversely affect the company's results, please see our SEC filings by recruiting our most recent form 10K.
Speaker 2: Today's remarks also include certain non-GAF financial measures. Please refer to yesterday's earnings press release available on our website for reconciliation of these non-GAF performance measures to our GAF financial results.
Speaker 3: I'm the call with me today from Kite Realty Group. Our chairman and chief executive officer, John Kite.
Speaker 3: President and Chief Operating Officer Tom McGowan. Executive Vice President and Chief Financial Officer Keith Fear. Senior Vice President and Chief Accounting Officer Dave Buehl. And Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw.
Speaker 3: I will now turn the call over to John . Thanks, Brian , and good morning or good afternoon, everybody. Look, to say that we're proud of what we accomplished here at KRG during the course of 2022 would just be a massive understatement.
Speaker 3: We are currently at the lowest leverage levels and highest fixed charge coverage ratios in KRG's history.
Speaker 3: Our ABR per square foot, leasing volumes, and blended cash leasing spreads are at a high watermark for KRG.
Speaker 3: For those reasons, amongst many others, we achieved the highest total shareholder return among our peer group, which is a testament to our team's ability to operate our platform at the highest level.
Speaker 3: I want to thank the entire team for all of its hard work, focus, and dedication.
Speaker 3: Our best days are clearly ahead of us and we are committed to extending our current streak of outperformance across every metric.
Speaker 3: Before I provide further commentary on 2023, I'd like to highlight some key metrics from a spectacular 2022.
Speaker 3: KRG generated FFO as adjusted per share of $1.93, which represents a 29% increase per share over 2021, and a 21% increase over the midpoint of our original 2022 guidance.
Speaker 3: Our same property NOI growth for the year was 5.1%, beating the original midpoint of our guidance by 310 basis points.
Speaker 3: Heath will lay out the components of our out performance to provide additional context later on.
Speaker 3: Our ABR per square foot has now eclipsed $20 and has still plenty of room to grow as demonstrated by the $27 rent per square foot achieved on all comparable new leases in 2022.
Speaker 3: Our net debt to EBITDA continued to trend down to 5.2 times, and we have over a billion dollars of liquidity.
Speaker 3: We leased nearly 4.9 million square feet at 12.6% blended comparable cash leasing spreads, which represents approximately 17% of our total GLA.
Speaker 3: Excluding option renewals, blended cash spreads for comparable new and non-option renewals were 18.1%.
Speaker 3: Our leasing volume and rent spreads clearly showcase the demand for our high quality shopping destinations and our team's ability to capitalize on a strong retail environment.
Speaker 3: More importantly, returns on capital for our new leasing activity in 2022 were nearly 36%.
Speaker 3: Leasing our existing space continues to represent the best risk-adjusted return of our capital.
Speaker 3: Not only did we execute on the leasing side, but our development, construction, and tenant coordination teams delivered spaces on budget and ahead of schedule in a very, very turbulent year for construction.
Speaker 3: We open 245 new tenants representing approximately $40 million of annualized NOI throughout 2022, which is another reason we believe our construction and development routes remain a competitive advantage for our platform.
Speaker 4: Our strategy for the next 18 months is straightforward.
Speaker 4: We still have 150 basis point spread.
Speaker 4: between our current and pre-COVID-least rate, which represents the most near-term upside amongst our peers. As we navigate an uncertain macro environment, we have the luxury of producing internal growth by doing what we do best, leasing space.
Speaker 4: Additionally, we have a healthy $33 million sign not open pipeline to help buffer any potential tenant disruption in 2023.
Speaker 4: The issues around bed, bath, and beyond in party city are well documented and heath will detail how we plan to address those tenants in terms of our guidance.
Speaker 4: Any disruption from those tenants could impact our lease rate in the near term, but they are not a read through to the broader retail environment.
Speaker 4: We continue to see strong demand from a variety of anchor tenants with whom we have recently signed leases, including Aldi, Lidl, Trader Joe's, Total Wine, Dick's Sporting Guads, Home Guads, Pop Shelf, Ulta, and Five Below amongst many others.
Speaker 4: Successful retailers continue to implement an Omni-Channel Strategy across their fleets, where the physical store is an integral distribution point to deliver products and services to consumers.
Speaker 4: Supply of high-quality open air retail space remains low, and demand continues to be strong, as demonstrated by our ability to grow rents at compelling returns.
Speaker 4: Our focus plan for 2023 is supported by one of the strongest balance sheets in the sector and limited future capital commitments.
Speaker 4: We have the flexibility to primarily focus our capital allocation efforts on leasing, as we only have $44 million remaining to spend on our active developments.
Speaker 4: Our measured approach to future development opportunities mandates that we take our time to establish the best risk-adjusted returns for KRG.
Speaker 4: Each development has its own nuances.
Speaker 4: And during the course of 2022, we made significant progress in preparing our entitled Land Bank as a lever for future growth.
Speaker 4: In various instances, we've demonstrated our willingness to monetize parcels.
Speaker 4: joint venture with the best in class partners.
Speaker 4: serve as a master developer and earn fee income or take on projects solely ourselves.
Speaker 4: At CARG, we prefer the optionality to evaluate each scenario with the duty of achieving the best risk-adjusted return for our stakeholders.
Speaker 4: On the transactional front, we remain opportunistic. And like last year, we intend to transact and pause the activity that are either neutral or creative by match funding acquisitions in our target markets with dispositions of non-core assets.
Speaker 4: For the time being, we feel this is the most logical approach, provided the strength of our balance sheet will allow us to immediately pivot should a compelling opportunity arise. KRG is in a very strong position. We will continue to operate the company with our signature focus and vigor.
Speaker 4: to showcase the quality and upside embedded in our portfolio.
Speaker 4: I'll now turn the call over to Heath for further color.
Speaker 4: Good afternoon and thank you for joining us today. It's impossible not to feel an overwhelming sense of accomplishment when looking back at what the CARG team achieved during this past year. There is a lot to unpack for 2022 and 2023, so let's get right to it.
Speaker 5: KRG generated 50 cents.
Speaker 5: of FFO per share as adjusted for the fourth quarter and $1.93 of FFO per share as adjusted for the full year.
Speaker 5: For the fourth quarter, same property NOI grew by 6.2%, with the main contributors being a 420 basis point increase in minimum rent.
Speaker 5: and recoveries and a 230 basis point increase in overdraft slightly offset by higher bad debt.
Speaker 5: The increase in overdraft is seasonal in nature, but a strong sign that retailers are thriving in our centers.
Speaker 5: For the full year, same property NOI growth was 5.1%. Animal rents and recoveries contributed 460 basis points to the full year growth.
Speaker 5: As a reminder, we reported FFO as adjusted and same property NLI excluding the impact of prior period collections to provide the best view into our core results.
Speaker 5: Looking back, we significantly exceeded internal and external expectations and beat our original 2022 FFO guidance by 21 cents per share.
Speaker 5: Given the magnitude, I'd like to bridge our original guidance to the full year actual to provide additional context.
Speaker 5: 8th sense of the beat is strictly related to operational alpha-formance by way of higher leasing spreads and 89% retention ratio versus our initial budget of approximately 80%.
Speaker 5: lower bad depth and an increase in overdrive.
Speaker 5: Five senses related to development fees and recurring but unpredictable items.
Speaker 5: which is in line with the numbers we laid out in our third quarter investor presentation.
Speaker 5: In additional five cents, we're murder related items, namely outperformance on initial non-cash rent expectations and lower GNA.
Speaker 5: The remaining three senses primarily due to transacting accretively and beating our development performers, specifically on the one loud and residential project. The past year was simply remarkable.
Speaker 5: As John alluded to earlier, we are providing May Read FFO guidance of $1.99 to $1.95 per share.
Speaker 5: While many of you thank us for the transparency and simplicity of our as-adjusted disclosure.
Speaker 5: For 2023, we plan to guide report NARE-FFO.
Speaker 5: As the prior period collection bucket is diminished at this point.
Speaker 5: Included in our guidance are a few key assumptions at the midpoint. Same property NOI growth of 2.5%.
Speaker 5: A full year of bad data assumption of 125 basis points and an additional 75 basis points of assumed disruption for bad, bad, and beyond in party city. As you may recall, regal cinemas rejected the only lease we have with them, effective January 1st, 2023.
Speaker 5: So, no additional reserves are necessary. And the 75 basis points of revenue destruction is solely attributable to that Beth and Beyond and Party City.
Speaker 5: On page four of our, the VARC, Ford's Quater Investor presentation, we set forth a bridge to quantify the impact of year-over-year trends on our 2023 Navy FFO guidance.
Speaker 5: Our net depth even stands at 5.2 times, which is on the lower end of our long-term target.
Speaker 5: Additionally, our debt service coverage ratio now stands at over five times.
Speaker 5: Our balance sheet is one of the best in our sector and CAREG has never been in a more opportunistic posture.
Speaker 5: Subsequent to quarter-end, we retire three secured mortgages for approximately $129 million using our $1.1 billion revolving line of credit as a temporary solution until the fixed income market stabilizes and our credit spread more accurate reflects the strength of our balance sheet.
Speaker 5: In the meantime, we are actively pursuing alternative solutions to satisfy our remaining 2023 Rabbit maker.
Speaker 5: Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.
Speaker 2: Certainly, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Todd Thomas from Keybank. Your question, please.
Speaker 6: Yeah, hi, thanks. Good afternoon. Hey, John , Heath, you both talked about the company's low leverage being at 5.2 times. Can you remind us of your long-term target leverage level?
Speaker 6: and whether you're still looking to take that lower in the near-term or is now the right time to begin putting some of that dry powder to work either in the form of stock buybacks or acquisitions.
Speaker 5: It's time to say thanks for your question. We communicate before that our targets load amid 5s and I don't think now is appropriate time to change that target. We also said that on occasion you may see it slowing above that based on transaction activity. You may see it below that. But again I think our long term target still is that the load amid 5s and it's 5.2 are actually toward the lower end of our target.
Speaker 4: In terms of deploying capital, Todd, as we pointed out in the prepared remarks, we still have lease up to do. We're getting very high returns there. That's really our focus in capital allocation right now.
Speaker 4: And who knows what happens down the road with a few of the tenants that we may or may not get back. So I think we're going to remain really flexible. We have, you know, we've got dry powder, we've got free cash flow. The balance sheet is the best it's been in the history of the business.
Speaker 4: So I think what we were trying to point out is, you know, business is usual right now. Get this stuff least, generate more free cash, grow internally, but to the extent that something really unique is out there.
Speaker 4: You know, we're in a position to take advantage of it and so that's just a great place to be.
Speaker 6: Right, okay. And I guess, are you starting to see more attractive acquisition opportunities begin to surface? I think John sounded like the plan is to at least in the near term look to match fund acquisitions with dispositions. and
Speaker 6: I'm curious, is there a segment of the portfolio that has maybe steadier or lower growth characteristics that you're looking to offload or are you just aiming to upgrade the quality of the portfolio and maybe you expect to see those opportunities in 2023?
Speaker 4: I mean, we're just getting started in the air Todd, so it's just beginning to evolve. But I think as things, you know, we're still in a little bit of a volatile world. Everybody is way to a baited breath for every fed meeting. And so until we get to this point when things are a little more stable, then I think you'll see opportunities maybe come to the surface more.
Speaker 4: So we'll continue to look for that Todd, but I think it's a little early right now, but things are starting to evolve and you are seeing, I think people start to figure out how how to transact and.
Speaker 4: And we'll wait for the right one or the right ones, I should say, and see what happens.
Speaker 6: Okay, great. And just one last one, Heath, in terms of the guidance. Can you give us a sense, I think in the bridge it looks like interest expenses, just about a one penny share headwind relative to 2022.
Speaker 6: But can you give us a sense? I know you had settled some of the forward starting swaps, which I think you were expecting about a $3 million annual benefit. Can you just provide a little bit more color there and I guess whether there's any additional balance sheet activity or financing activity that's...
Speaker 6: That's embedded in the guidance to get to that sort of one penny. Sure. Increase.
Speaker 5: Sure, so as you mentioned, the $3 million interest expense savings from the hedge isn't bad in that number. So what we're currently modeling taught is basically, providing out each one of our existing maturities until the very end. This is obviously a triathlete price debt, so no rush to prepaid. We're putting it on our line, and then in the fourth quarter we end up issuing.
Speaker 5: a bond issuance again in our model for $300 million. And when you put all that together, it's a penny diluted into 2023. I will say, however, and I mentioned in my remarks, we are looking at other ways of retiring on maturities. As I'm looking at our indicative credit spread and
Speaker 5: Contrasting that to our net debt to IBA and our coverage ratios and every other metric That you see it really doesn't feel very good for us to want to be into the fixed income market And so we'll wait for that to settle down until our spreads are more you know priced indicative to our actual credit profile So some of the things we're looking at is you know we may put a mortgage on One of our residential jeep joint venture
Speaker 5: the asset, the yield, and the asset versus what I could avoid in issuing new debt, call it at 6.5% or 7%. We could actually dispose of assets in a way that delivers you and is also neutral to your earnings. So it's another method of flexibility. So to the extent we're successful in disposing of something and we don't have an immediate use in terms of an acquisition.
Speaker 6: Okay, great. And what are you earning on the $115 million of cash on the balance sheet right now? Josh, I haven't looked at a depository rate recently. I don't know. About 3.5%.
Speaker 6: Okay, all right, great. Thank you.
Speaker 2: Thank you one moment for our next question.
Speaker 2: And our next question comes from the line of Craig Mellman from City. Your question, please.
Speaker 7: Good afternoon, guys.
Speaker 7: Just a follow up kind of on your thoughts. I hear you on not wanting to hit the bond market until kind of spreads. Reflect where you guys think you are from a credit perspective, but at the same time, you know.
Speaker 7: John , you talked a little bit about taking advantage of the acquisition market. I mean, from your kind of vantage point, I mean...
Speaker 7: How do you get comfortable with market cap rates if...
Speaker 7: You know to debt market and maybe it's a different one security market But the debt market hasn't you know materially normalized to where your credit profile is being you know Recognized can you kind of just bridge that you on the debt market versus acquisition capital?
Speaker 5: Craig, I think the debt market and our indicative spreads is really a function of just the uncertainty in the fixed income space and where rates are headed. And so, I think, and it's particularly exacerbated for care, G, because a lot of times, not a lot of times, but you are existing issuances act as a marker.
Speaker 5: the time and if I can issue debt at the right particular rate at time we'll go ahead and do an acquisition or if I don't have use for it I'll pay debt down and I'll re-lover later. I think that relationship that you're discussing it's working itself out now. So I think it's the matter for us just to be patient and wait and see. And the good news is we have the ability to be patient.
Speaker 4: I guess the only thing I'd add to that, Craig, is that we're looking at opportunities.
Speaker 4: It's not exactly linear between what long-term rates are and what an IRR is in a particular acquisition.
Speaker 4: So there might be opportunities for us to get into something that on a going in yield is you know lower than what it would normally need to be where the cost of capital was but that the IRR had you know enough juice in it that it all works out right so you that's why we're pretty calm on that front right now that's why there's not a lot going on on
Speaker 4: opportunities and we are always underwriting things and trying to figure out where do those, where will that come together, where it makes sense for us. So it's not only about where medium term and long term rates are at any one point in
Speaker 7: Now, that's helpful. And he just a magnitude of what you could put on from a mortgage that perspective in the JVs, from the agencies, kind of dollar volume potential.
Speaker 5: The one that we're looking at right now, Craig, is that it would result in about $99.00 of proceeds to CARG.
Speaker 5: We've got other projects, some of them are various stages of construction, so it's a little less clear what we could produce out of those particular assets. But that's the large one we're looking at. That's 90 million against 285, that's taking out a very good chunk of our maturities for 2023.
Speaker 7: Hopefully then, John , you mentioned, you know, you're still 150 basis points below. Kind of where you were pre-COVID, at least I hope you see that. The legacy kite portfolio is that kind of marrying RPAI and kite and coming up with that number.
Speaker 4: Yeah, I mean, it's the combined company in terms of where we are right now, Craig, and we're not, as you know, we're not, we're well past the time of breaking out different portfolios, we're operating obviously as one company, one team. So it really is just the combined business and...
Speaker 4: You know, we obviously, as far as the kite side of the equation, we did have a bigger hit during COVID from one particular tenant, which was Stein mart, so that kind of overly impacted that side of our business, but now our anchor, anchor lease percentage is almost right there.
Speaker 4: versus where we were in 2019. So it's really about the shops. The opportunity is in the shops, which is great because that revenue materializes quicker than box revenue in terms of the timelines it takes to turn over spaces.
Speaker 4: So I think there's real opportunity there and there's real rent growth opportunity there as well.
Speaker 7: And then he's on the three cents related to bed bath and party city. Could you talk about kind of what?
Speaker 7: Assumption is embedded in that in terms of either timing or ultimate store closures, kind of what goes into that net drag.
Speaker 5: Sure. So again, this represents our best estimate right now. And for better or for worse, this is not the first time that we're doing this sort of exercise. This won't be the last time we're doing this sort of exercise. And so really, it was a ground up space by space analysis. We looked at sales, we looked at health ratios.
Speaker 5: quality of the real estate based on some direct discussions with the tenant and closure list. So we kind of triangulated, again, our best estimate. And at this point, we're not really wanting to get into the sausage making in terms of what the particular assumptions are around each tenant or each space, again, it's space by space. And we are an ongoing discussion. So I think...
Speaker 5: Just letting you know that we were very thoughtful on how we came up with this 75 basis point number. We'll see how it shakes out.
Speaker 7: And apologies if I missed this, but did you go through kind of any the number of store closures that have been on the bed bath list that are kite and maybe what the you know the man has been so far if there's any L.A.L.I.s outstanding or
Speaker 3: So, so far on, on Bedbath, we've been identified with three potential closures. These lists are out there so we're working under the assumption that we will get those three back. So, we have quite a few, quite a few tenants that are interested in these spaces. One thing to remember.
Speaker 3: expirations we took two stores back. They have both been leased already. Those occurred in January . So we're already off to a good shot, you know, a great start. But the interaction amongst every national retailer on these lists is very vibrant. So we feel very good about where we're headed at this point.
Speaker 7: Thank you.
Speaker 8: Thanks.
Speaker 2: Thank you, one moment for our next question.
Speaker 2: And our next question comes to the line of Floris van Dycken from Compass Point. Your question, please.
Speaker 9: Hey guys, thanks for taking my question. So obviously, good set of results. There's, you know, starting to become some partial recognition of the transformation, I believe, that you guys have undergone in terms of your balance sheet.
Speaker 9: and obviously portfolio with the RPAI transaction, but there appears to be some left. I'm just curious.
Speaker 9: Last year you beat your guidance by, call it 10%. Where do you think, if you were to beat this year, where would that be? Where could you beat and does that, have you in your numbers assumed term fees?
Speaker 9: for space that you get back from troubled tenants? And how much more scope do you think there is in the small shop occupancy? Is that part of your S&O pipeline? Is there more scope there? Presumably those take, they're quicker to take occupancy of that space as well. And then maybe are there any other...
Speaker 4: 2027. Now I'm kidding. But
Speaker 4: Let me back it up a little bit. So look, I mean, we're just like last year in terms of guidance. You know, it's, we're early, obviously very early in the year. There's a lot of moving parts.
Speaker 4: We tried to be as thoughtful as possible around.
Speaker 4: you know potential impacts from the known tenant challenges that are out there and really kind of going above and beyond and actually breaking out the impact that we thought was out there from bed bath and party city in addition to that you know and having a basically an extra 25 basis points above
Speaker 4: where we were last year in terms of bad debt. So how that par lays into potential outperformance down the road, it's really too early to say. If clearly if things go better than the forecast, I mean you're looking at the opportunity to outperform. And...
Speaker 4: You know, bed bath in particular has ebbed and flowed and now currently has a new capital source. That's a new thing. We'll see how that goes. So I just think it's too early to say, hey, we think we can outperform to a very specific number. In terms of the leasing side of the equation.
Speaker 4: Well, let me let me back up. You said something in the beginning that we appreciate, which was the beginning of people seeing the
Speaker 4: the spectacular results of the combination of the companies. I want to make sure that everybody looks closely at the investor presentation. In particular, when you go through pages 6, 7, 8, 9, 10.
Speaker 4: You know, not that the rest of it is an outstanding, but those are really, really important pages because it covers what you're talking about. And there is a page in there in terms of the merger and what we laid out at the time that we did the merger and that we communicated with the street. And then the actual results that occurred, which...
Speaker 4: Literally no one can deny that we did a very complicated tough transaction and we did it extremely well. It's only because of the team that we have the way everybody came together. And frankly, that's why one of the pages says 1 plus 1 equals 3 because the results, you know.
Speaker 4: were at least threefold better, you know, in terms of total output. So I would also say that. And then in terms of your question about small shop leasing, again, we're not going to sit here today and give what we think we're going to end the year at in terms of our small shop lease percentage, but suffice to say.
Speaker 4: Since the anchor lease percentage is within like I don't know 75 80 basis points of where we were It's the upside is clearly in the shops and you know the portfolio is very strong. You look at all the deals we've done You look at our spreads by the way and you look at the spreads versus the top five
Speaker 4: You know, we're clearly outperforming, particularly when you look at our ABR versus everybody else's ABR. So I could go on and on, but that was a multifaceted question.
Speaker 5: I think the last two-seer question, Laura was about the merger and whether there are any additional benefits into the later years. On the GNA front, we're looking at fairly modest benefits into 2023. We still have some lease payments that are burning off some software subscriptions. But I think the one merger benefit that's gonna keep giving for the time being is really the application of our operating platform.
Speaker 9: Thanks, guys. It may be just a fallup on the small shop. Your S&O pipeline.
Speaker 9: presumably include some small shop as well. What is the gap between your least and occupied in your shop space today? Because that's where you know again a lot of the you know the future growth is gonna come from. It's 400 basis points floors.
Speaker 5: So it's pretty significant. Okay, thanks. So we're 9% at least and we're 86% occupied. Except for me, God, thanks. Thanks for it. Thank you one moment for our next question.
Speaker 2: And our next question comes from the line of R.J. Milligan from Raymond James. Your question, please.
Speaker 2: Hey guys, good afternoon. Let's look at for a little bit more color on the general 125 basis points of bad debt that's built into guidance.
Speaker 2: I'm curious how much visibility do you have on that currently in terms of basis points, maybe tenants that have already fallen out? And then can you describe sort of the mix of expectation, whether it be small shops or is the bulk of that assumption from small shops? Are there any...
Speaker 2: big box tenants that you're concerned about that you're building into that 125-base response.
Speaker 4: RJ, both Heath and I could talk about it. My big picture, let me just say big picture. I mean, we're.
Speaker 4: Whatever, it's February , mid-February. We haven't, there hasn't been much impact yet. So this is really a go-forward reserve. You know, I think, I think as we looked at the year and we started to see, you know, some of the tenants that we had talked about in the past beginning to struggle, it, it, it,
Speaker 4: I seem to be prudent to elevate it a little bit, but there isn't any specifics around it. You know, when you look, particularly the fact that we carved out Bed Bath and Party City separately, it certainly gives us more room in the small shops since, you know, obviously those are both anchor tenants from a square footage perspective. It gives us more room to absorb small shop.
Speaker 7: Thanks. And then my second question is just what are the expectations for paying occupancy and how does that trend quarter to quarter throughout the year? Turns out how the leases turn on, RJ's out your asking.
Speaker 5: Right, in combination with the potential fallout. I think a proxy for that question based on so much SNL that we have is what's the trajectory of our same store in Hawaii. And I'll tell you that it's going to look a lot like it did last year. You know, it'll be strong on the first quarter and it'll decelerate a little bit into the second quarter and then ramp up to the back half of the...
Speaker 4: modeling RJ, but we also, in that, we've modeled that debt reserve to be higher than it was last year with the idea that if the economy did have less of a soft landing, we'd be able to absorb that handily. So look, if the economy continues on its current path.
Speaker 4: That feels like a very safe number.
Speaker 4: That feels like a very safe number. Thanks for that, Chris.
Speaker 8: Thank you.
Speaker 2: Thank you one moment for our next question.
Speaker 2: And our next question comes to the line of Alexander Goldfarb from Piper Sandler. Your question, please.
Speaker 10: Good afternoon out there. So two questions. First, Tom, you know, a lot of the shopping center companies, including you guys have spoken about. Um.
Speaker 10: a lot of this preemptive demand for space that could be given back from potential troubled retailers. And just curious, over your decades of retail leasing, how common is this? Is this just something that normally we've never really asked about, but it's always been there?
Speaker 10: or is this truly a different point in the retail cycle to see so much proactive demand from the retailers themselves saying, hey, whatever space you have, we want, we want.
Speaker 3: Yeah, I would say this is a fairly unique period of time, Alex. I think it's simply driven by the lack of supply and you have these major retail formats that are growing. And they're wanting to locate in the best shopping centers possible.
Speaker 3: So I think when we're dealing with both bad bath and beyond party city, you know, there likely be some discussions that go the other way or hey, work and we work with you to get spaces back and they're going to be very aggressive, aggressive with us in terms of trying to stay in the location.
Speaker 3: I think this will be as interesting of a process as anyone we've gone through. You know, we've been through quite a few of these, you know, whether it's towards or us, which are oversized boxes or others that are more difficult. We're in the perfect wheelhouse right now, you know, where we have a situation from a sizing standpoint that...
Speaker 10: people taking a look at these opportunities. And then just following up on that. So, you know, he...
Speaker 10: opportunities. And then just following up on that. So, you know, he, as you think about
Speaker 10: to this year and next. Is it more from unforeseen, you know, future retail closings? Or is it more just getting the backfill tenants open? So I'm trying to get at, are you more concerned about tenants closing or are you more concerned about the downtime that's needed between replacing
Speaker 5: the previous tenant with the new better tenant. You know, I was honestly not sure. I mean, in terms of the down time, I will say that we have an amazing construction team and getting tenants open is what they do best. We had a schedule, I had a budget last year, so to the extent that we sign a lease up, I'm very confident in our abilities to hit our budget at time in order to get that open.
Speaker 5: of additional bankruptcy, it's not how it feels at all. It's more back into the normal pace. So I don't think that I'm biased either way and being worried more about downtime or worried about fallout. Yeah, I mean Alex from my perspective.
Speaker 4: Yeah, again, it's just too early to handicap how the year is going to play out. I think the most important thing is that we built in a very flexible plan. We assumed that we would have more fallout than we did last year.
Speaker 4: and everything in our model, our balance sheet, everything is very capable of handling whatever might occur. But it certainly doesn't feel as though at this point in time there's going to be, as he said, some additional deluge of tenants.
Speaker 4: It's just hard to underwrite early on. So I think, look, let's get through this first, you know, we need to be through the, into the first half of the year to have a better feel for all that. But we're clearly, you know, we're clearly positioned to handle it very, very thoroughly. And I think, look, downtime is always here.
Speaker 4: your biggest issue on the anchor side. You know, downtime on the shop side is much more manageable. So truly, hopefully we've identified the anchors that are at risk. There's a couple others out there, I'm sure. But right now it feels, it doesn't feel tremendously different other than these isolated cases.
Speaker 8: Thanks, John . Thank you.
Speaker 2: Thank you one moment for our next question. And our next question, Cupsal Line over Anthony Powell from Barclays. Your question, please.
Speaker 11: Hi, good afternoon. It's a question on your base rent assumption for 2023. If I look at your NOI growth of 2 to 3 and some of the headwinds from bad data, seems like you're at 3 to 4% growth for 2023. Is that fair?
Speaker 5: I'll give you the components Anthony for the same store at 2.5% at the midpoint you're looking at Contributions from minimum rent growth of 300 basis points Recovery of a hundred basis points partially offset by the bed bath and beyond a party city reserve of a hundred basis points
Speaker 5: over a drent of 30 basis points and bad data of 20 basis points. So yeah, that all together and that's your components of your 2.5%.
Speaker 11: Guy, thanks. That 300 basic points seems conservative. You're at 3.4% in the fourth quarter, and you have a big snow pipeline and things leasing spread just strong. So I'm guessing asking why that wouldn't that accelerate from the fourth quarter growth that you achieved? Well, Anthony, as John said before, it's the beginning of the year. You know, we are.
Speaker 5: Obviously, very focused on outperforming these numbers, but we thought that was a number that was we were comfortable starting at. It's like the bad data assumption. Again, it's the beginning of the year. So we'll see how that pans out. And remember, there's another 25 basis points of bad debt on top of what we experienced outside of bad math.
Speaker 4: and party city that's hitting that a little bit too. So I think again, as we sit here today, we feel like we're position well, Anthony, and we absolutely want to outperform these numbers, and we absolutely want to stay on the same trajectory we had last year.
Speaker 11: which is to outperform quarter by quarter. Thanks. And one more shared buybacks because you may be updated on what your philosophy or approach is to share buybacks. And I know you mentioned that you want to spend more on a, spend capital on leasing and for still on a certain economy here, but there's some great.
Speaker 11: Opportunities to buy back stock last year, you still have a 400 million in place on the security, what your view is on buybacks and under what conditions would you actually use the authorization.
Speaker 4: Yeah, I think I think that buybacks about 300 actually not 400 but yeah, that's okay. Not that we're counting the extra 100. I think it's the same philosophy right now that it's always discussed.
Speaker 4: We have it there for a reason. We have not acted on it at this point. We are definitely laser focused on closing the gap in our lease.
Speaker 4: percentage and our least occupancy back to pre-COVID levels that takes capital. The returns on this capital are substantial. We also are holding buffer capital for the potential fall out of some of these tenants that we mentioned.
Speaker 4: So with all that being said, it's definitely on the list. I think we're prioritizing capital in those other places right now. And we'll see where we go. And I've said this before, so it sounds like a continued dialogue, but the dialogue is accurate in the sense that we're always going to be nimble around that.
Speaker 4: If the opportunity presents itself in a very, very material way, that would be great. But right now we're just going to focus up leasing up that stuff, Anthony, spending the money, getting those significant double-digit returns there. And then finishing out the development pipeline, even though it's small, it's still $44 million.
Speaker 4: Those are our primary uses of capital right now.
Speaker 4: Those are our primary uses of capital right now. All right. Thank you.
Speaker 4: This is a capital right now. Thank you. Thank you.
Speaker 2: Thank you one moment for our next question.
Speaker 2: And our next question comes from the line of Lizzie Doiken from Bank of America. Your question, please.
Speaker 12: Hi, thanks for taking my question. I was curious if you could just underline the assumptions behind the two senses impact included from GNA and whatever else might be included within guidance. Thanks. We mentioned in our third quarter.
Speaker 5: call that, you know, obviously with wage inflation, et cetera, that there could be some pressure on GNA into this year. Again, because we're giving people raises, et cetera. So that's one component of what's in there in the GNA. And the other is really just some non-cash elements.
Speaker 5: which happy to discuss with you offline, in particular with those, but those are the two components that are in that, in that particular lineup.
Speaker 12: Great. And is there any additional synergies but being assumed from the merger within that assumption?
Speaker 5: Listen, we did talk about the additional GNA synergies in the merger over the course of 2023. It's not going to be very meaningful, but there are some rents, etc. some software licenses that will be burning off. So there will be some additional merger synergies. I would say that this two-cent difference is more in a cash basis.
Speaker 5: So, again, very little in terms of additional merger impacts.
Speaker 12: Okay, thanks. And I was also curious to get your latest thoughts on Kroger and Alderton's just given the latest update they put out. It really just narrowed the range for expected store closings. But, you know, can you confirm how many stores you do have? Yeah.
Speaker 12: exposure to that could have potential impact with it just given the overlapping exposure and just any latest thoughts on that.
Speaker 5: So we have a total of 17 units of them combined. And we did sort of an overlap study, a three mile radius, which is, by the way, for grocery stores, probably pretty generous. And we really only have two that overlap. So I don't feel very, very threatened by the idea that they may spin off to the 300 stores. And by the way, if they spin off to the 300 stores.
Speaker 5: You know, they're going to have to make sure that they capitalize that entity properly. So it's not that they're going to spin off two to three hundred and that's going to be some entity that's going to limp out into the world and immediately shut stores down. So again, very minimal overlap for us for those those two grocers and.
Speaker 5: We're not really, the merger is not, I have a material impact for Kay.
Speaker 5: the merger's not gonna have a material impact for Kite. Got it. Thank you.
Speaker 5: material impact for Kite. Thank you. Thanks.
Speaker 2: Thank you one moment for our next question. And our next question comes in line of Paulina Rahos from Green Street. Your question please.
Speaker 2: one moment for our next question. And our next question comes in line of Paulina Rahas from Green Street. Your question please.
Speaker 13: So we talked about the financing market, but I'm curious where is today property level financing for shopping centers and if there is any difference between the rate you can get for grocery, young, good and...
Speaker 13: and then on the other side a larger power center.
Speaker 5: We haven't been in the market for more money financing on any retail assets as we mentioned the only one we're currently looking at is some agency debt for residential markets. We do keep close and I have friends in my prior life. I did a lot of CNBS.
Speaker 5: and life company loans. And you still can get a decent bid on a grocery anchored center. I would say there was a bit on power even. Last year it would sort of wane with the movement and interest rates. So my guess is for really core stuff, you still can get.
Speaker 4: You still can get good financing rates, but for weaker assets, it'll be a little tougher, but that's how it seems. It generally works, right? Paulina, I've got a, like he's, I definitely keep connected to this and got a lot of friends in the private market.
Speaker 4: There's definitely financing available on every retail product power included. For us, it's just, you know, that's not a market we're in as, you know, we're an unsecured bar or focused on that. So, but it's definitely active. There's always going to be spread between...
Speaker 4: different product types, but I think it's not, it was extremely wide a couple of years ago that narrowed, and you're seeing transactions happen. So I think it's healthy. I think the retail market has become much healthier from a.
Speaker 4: availability of credit and capital. It's just the word at this point in time with the inverted yield curve that makes things challenging.
Speaker 13: Thank you for the color. And then regarding the announced that bus closures and curious are these mostly leases that were scheduled to expire in 23, or we're talking about early terminations here. And if you'd wear the ladder, are you pursuing to obtain any…
Speaker 3: And then from a bedbath and beyond standpoint, our current list has us with closures of three stores. So we're already actively working on that. And I think just as a point of context, in 2022, we released 23 boxes at north of 465,000 square feet.
Speaker 4: So we're already chipping away at each and every one of these. In terms of the question around expiration, these are early, but in terms of our guidance, we don't have any term fees in our guidance to be clear.
Speaker 5: And Paul, and it's worth noting that the two party cities that Tom mentioned that closed these of the natural aspirations both of them have been backfilled and they're released to pop shell. So great credit tenant replacing party city. Again, an example of the demand in place.
Speaker 13: Great and very short and last one. If you were asked where are you seeing the more, more striking, the uncle or in the small, small shops by today.
Speaker 14: You are asking me here is
Speaker 4: Sure, Pauline, it's very well balanced. I mean, as you can see, just from the numbers, where our anchor least percentage is almost back to where it was pre-COVID. So that's been very strong.
Speaker 4: And now if you look at this quarter, the last quarter, and you look at our sequential growth, the sequential growth in the small shops was strong, stronger than anchors because we've closed that gap. So now, obviously because we're getting so least up in the anchors.
Speaker 4: You know, you're going to see more activity in the small shops. The demand is strong. It's broad-based.
Speaker 4: If you look at our investor presentation, I think we have a page in there about all the small shop leasing and the different types of tenants. And this truly is the strength of open air retail. And it's really, I think I want to make sure people understand the depth of the pool that we draw from.
Speaker 4: in leasing small shops and anchors from so many different product types, so many different types of retailers, but it's really highlighted in the small shop category. It's just amazing. And Tom, you may want to add some color to that. Yeah, particularly on small shops, you have what we call our...
Speaker 3: that you may have originally seen in malls, etc., are E. E. Ritzia, Nike, LoSAC, Yeti, and the list goes on and on. So we've really as a company over the last year expanded that pool to not only be the bread and butter of the key tenants that we operate with on an annual basis, but really bringing in new and exciting names.
Speaker 2: moment for our next question. And our next question comes to me, line of Linda Sy from Jeffery's Your Question Please.
Speaker 15: Hi, what kind of rent upside do you expect for the bad back and beyond boxes and what was the rent upside on party city being released to pop show?
Speaker 3: So on the bed bath and the ones we have 22 right now and it's a nice square footage. It's about 27,000 square feet on average. So if you start taking down on what that average ABR is, we feel like we have strong. So on the bed bath and the ones we have a nice square footage.
double-digit potential spread opportunities through there. And then on Party City, those numbers are at 15,000, which also gives us quite a bit of flexibility. Those numbers are a little bit below $16 on an ABR basis.
You know, we also feel that's a prime example to get into the double digits, if not higher spreads. And Tuesday morning at 12,000 square feet, same situation, a lower number at 1358 with plenty of room to grow. So on the party, on the party city deals that you talked about, one was very positive. That's just about it. The majority during the public office deals with, that makes you think that's pretty much as a world, would you.... Because the best deals are fake.
13 and we we view the bye bye baby and bed bath is two very different situations. And so in terms of bed bath, you know, we've got one large store in Westbury and on Long Island that's, you know, a large store big red, as you as everything else is around there. So if you exclude that store.
The rest of the bedbaths are actually below $12 a foot.
And as you know, our anchor average is 15 plus. So there's real upside there. I mean, we're gonna, we obviously take it one deal at a time and it's more than just rent, it's also the user, but there's true upside there if that were to come to fruition.
Thanks for the collar and then do you just remind us what a historical least to build spread looks like and how many quarters it would take to normalize?
I mean, normally that's closer to 150 max of 175 basis points. So we're well above that, obviously. And it just depends on historically, if you're more tilted towards the anchor side of that, that's usually 12 to 18 months of
You know, to get a 10-it-back and get rent commencing, the small shops is less. So, I don't have the actual spreadsheet in front of me that refers to that. But that's kind of a macro big picture that we're definitely well above but shrinking, I mean, it's compressing.
So, and that's why we're very focused on leasing the small shops back to our high water market of 92 and a half. There was a time where our high water mark was 90, where we sit today. It's just that we push that to significant heights pre-COVID, and now we want to push it back.
Good thing is it's all, it's very opportunistic. The only thing I'll add, Linda, John mentioned in his opening remarks that we still have the most remaining leasing upside to the 150 basis points as compared to sort of pre-coated levels. So it's really an exercise in, you know, how fast are you turning on leases versus how fast are you signing them?
So if we're successful this year in leasing anything close to the velocities we're releasing last year, I'd expect that these documents spread to remain elevated until that exercise is done. And then see it more normalized toward the end of 24 slash 25. When we get back to that level of John told you 125 to 150 basis points. So.
That's how we take a lot of. Thanks. Thank you.
Thank you. Thank you.
And our final question for today is a follow up from the line of Todd Thompson from Keybank. Your question, please.
Yeah, hi, thanks. Appreciate the time here. I just had two follow-ups. You know, one, you mentioned that recoveries are expected to contribute about 100 basis points. And, you know, Kite has a higher percent of leases on 6th cam than peers. Is that what's contributing to the higher recovery forecast in 23 years?
more a function of the higher occupancy. It's higher occupancy, that's the largest driver time. FixCAN is certainly something that's going to, obviously, improve our margins over time, but that takes a long time. You know, and before the merger, we were around 50% of our leases have fixed CAM in it.
Now we're around 35, 41. Oh, sorry, 41. So that's going to be the gift that keeps on gifting. And then the third thing is just operating more efficiently. And against that fixed cam initiative. But again, most of this is occupancy driven for now. And the longer term benefits you'll see as we get more.
and our recovery ratio in a vacuum relative to what ours are the quarter before the year before but when you look at the recovery ratio and the NOI margin compared to peers, I mean we're blown that away and you know I do think fixed cam is an important contributor over time and it's not an easy thing to just start doing
And I think that we have a nice lead in that respect. And if you look at the conversion ratio in Q1 versus Q4, I mean Q1, we converted around 60%. Q4, I think it was almost 90%, it was like 87%. So it matters. And it's a gift that keeps on given, frankly.
Is it easier or is it more difficult to convert tenants in this environment where there's been more expense inflation perhaps or just higher cost in general?
No, I mean, I think look, I think it's, first of all, nothing's easy, but it's easy to explain the methodology. And remember, from our perspective, we are excluding non-controllable expenses. And I think that it's...
So it's important that you understand that, that we're not taking exposure there relative to inflation. And I think tenants just want to be able to know what their budgets are, okay? So I think that's been one thing. And again, this is a difficult thing to snap your fingers and just do. And you know, anyway. So let's analyze the!!)
So we're pretty far out in front of that. Okay, and then my final question is just with regard to the bad data assumptions, I know there's been a lot of dialogue around this, but I just want to make sure I understand or get some clarity here. You have 125 base points for potential disruption.
just across the portfolio. The 75 basis points for bed bath, party city, and regal, that's separate. Does the 2-3% same-store-no-I growth forecast, you know, your budget for the year itself? Does that factor in the closures that you're aware of or that you anticipate capturing? Is there sort of anything?
Again, that 75 basis points is our best estimate of the impact. But for that 75 basis points are guidance. This quarter for the full year 2020 would have been at 3.5% savings to R&W. So it's built in there. Again, don't want to get into too much detail in terms of what the exact assumptions are around those potential disruption.
And then John mentioned the 125 is more of a general reserve. Against typically, it were somewhere in the 75 to 110 basis points of total revenues a year. So based on the world, we are the more conservative going into 2023. Yeah, and then specific to your close. Hey Todd, specific to your closure question, the closures that occurred in the party city or would all get penalized in December ? And I think what you have past? from us are initial related accounts, not additional accounts for 10 dollars of questions. That has indexedzag generate property, sue??????????????????????????? ?folk Governor code-profit-exasciences.com.com
right that has already closed that's still paying rent. The others have been identified and that would be covered in your in your in your separate 75 basis points.
Okay, understood. All right, that helped them. Thank you. And remember when we say identified Todd, it's a little bit of a moving target. Multiple list of Tom is referred to. I think their view on the world is maybe different today than it was three months ago.
So we'll see where that all plays out. Yeah, no direct communication on those three whatsoever. So Todd, just to make sure that we're abundantly clear, the 75 basis points is a combination of some...
ones that we dig are closed for sure and then handicapping in the balance of them.
So hopefully that answers your question more directly. Yeah, it does. John , you know, you just maybe think of one more question actually. So in light of some of the capital raising activity from bed bath, it sounds like some of the closure lists might be a little bit more fluid. Once again, is that sort of your understanding?
I mean, I think our understanding is safe as everybody else is that they did raise some capital. You know, I think that...
You know, they're going to try to continue to operate the business, but we're being conservative in what we assume is going to happen. Let's put it that way.
They're going to try to continue to operate the business, but we're being conservative in what we assume is going to happen. Let's put it that way. Okay. All right. Thank you.
All right, 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, again, I just want to thank everybody for taking their time and I really, really want to thank the entire KRG team for an incredible performance in 2022. Let's bring it on in 2023.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.