Q1 2023 Kite Realty Group Trust Earnings Call
Speaker 2: Good day and thank you for standing by.
Speaker 2: Welcome to the Kite Realty Group Trust first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session.
Speaker 2: To ask a question during the session you will need to press star 1 1 on your telephone You will then hear an automated message advising your hand is raised to draw your question. Please press star 1 1 again Please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker today Brian McCarthy, please go ahead
Speaker 3: Thank you and good afternoon 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.
Speaker 3: Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K . Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release.
Speaker 3: Available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Tight Realty Group are Chairman and Chief Executive Officer John Kitez, President and Chief Operating Officer Tom McGowan.
Speaker 3: Executive Vice President and Chief Financial Officer, Keith Fehr, Senior Vice President and Chief Accounting Officer, Dave Buell, and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. I will now turn the call over to John .
Speaker 4: Thanks Brian and good morning everyone. KRG strategy for 2023 is a straightforward plan anchored in our training center with your support
Speaker 4: We intend to lease space at attractive risk adjusted returns, operate our high quality portfolio at sector leading margins, and maintain a rock solid balance sheet.
Speaker 4: This plan focuses on our key strengths with the ultimate goal of delivering sustainable value for all stakeholders.
Speaker 4: I'm pleased to report that KRG's first quarter results exceed our 2023 plan and our streak of outperformance continues.
Speaker 4: We generated FFO per share of 51 cents, beating consensus estimates by four cents per share and representing an 11% increase over the comparable period last year.
Speaker 4: Our same property NOI growth for the quarter was six and a half percent as compared to the same period in 2022.
Speaker 4: Heath will provide more details around the components of each metric. Care G signed 144 leases representing over 830,000 square feet, producing 13% blended cash spreads on comparable new and renewal leases.
Speaker 4: Excluding the impact of option renewals, our blended cash spreads on comparable leases was 21%.
Speaker 4: More importantly, KRG earned a 42% return on capital for comparable new leases, which translates into an average payback period of only 2.4 years. The retention ratio in the quarter was nearly 90%, which is well above historical norms.
Speaker 4: Based on our ability to drive pricing, produce strong returns, and retain existing tenants, it should come as no surprise that we are experiencing strong demand for our Bed, Bath, and Beyond boxes.
Speaker 4: Our current guidance assumes that we will recapture all of our bed bath locations and that we will not be paid any rent beyond what we have already collected to date.
Speaker 4: Open-air retail will always be Darwinian, and tenants that are slow to adapt will be nudged aside by more agile competitors.
Speaker 4: It's what makes our business so dynamic and interesting.
Speaker 4: We've been through this exercise before and as it relates to bed bath or any struggling tenant, we'll gladly trade any temporary disruption for the long-term value creation associated with re-letting these spaces to vibrant and traffic generating tenants.
Speaker 4: The good news is that bed bath boxes are attractively sized and located in prime spots within our centers, which we expect will translate into healthy releasing spreads and strong returns on capital.
Speaker 4: Currently, we have significant interest in our locations from a variety of categories including specialty grocery, discounts, sporting goods, and home furnishing.
Speaker 4: We have persistently maintained that leasing existing space offers the best risk-adjusted use of our capital and we're poised to swiftly address the backfill potential for these boxes.
Speaker 4: The past two and a half years serve as a great example. We've executed 58 anchors representing over 1.4 million square feet at 18% comparable cash leasing spreads and 20% returns on capital.
Speaker 4: You've often heard us say that the only permanency in our business is the underlying land. Everything on top of it can change. When asked which open air format we are most likely to invest in, our answer is always we invest in great real estate. We're starting to see the same philosophy implemented by our region.
Speaker 4: realization that brick and mortar stores are the primary distribution point along a supply chain that requires convenience, speed, and healthy profit margins.
Speaker 4: As a result, we focus on the underlying quality of the real estate across a variety of product types. Our portfolio is well balanced among the open-air retail categories, thereby offering a wide array of options to our retailers.
Speaker 4: Furthermore, our product is pliable enough to reconfigure.
Speaker 4: To reconfigure if the real estate dictates a different use.
Speaker 4: These trends, together with the lack of meaningful new supply in the open-air retail space, have created an extremely favorable supply-demand dynamic for KRG.
Speaker 4: The culmination of all these great things I've just mentioned is allowing KRG to increase its NAIRIT FFO guidance by three cents per share moving the midpoint from $1.92 to $1.95. We're also increasing the midpoint of our same property NOI growth assumption by 25 basis points moving the midpoint from 2.5% to 2.75%.
Speaker 4: I'll now turn the call over to Heath to provide additional details. Good afternoon and thank you for joining us today. I'm pleased to report that KRG has kicked off 2023 with another quarter of outperformance.
Speaker 4: For the first quarter, KRG generated 51 cents of NAIRIT FFO per share.
Speaker 4: which was 11% higher than the comparable period in 2022. This year over year increase was primarily driven by higher same property NOI, which grew by 6.5% in the first quarter.
Speaker 4: Increased occupancy was a primary driver of our same property and a wide growth, with a 440 basis point increase in minimum rent, 120 basis point increase in net recoveries, and a 90 basis point increase in overage rent. As John alluded to earlier, we are raising our day rate FFO guidance to $1.92 to $1.98 per
Speaker 4: Another penny is attributable to a short-term lease we entered into with the legal theaters for the location in the Los Angeles MSA. The final penny is a result of higher non-cash items related to a reversal of certain below market lease intangibles.
Speaker 4: Our revised full year guidance range relies on the following additional assumptions at the midpoint.
Speaker 4: Same property NY growth of 2.75 percent.
Speaker 4: neutral transaction activity, full year of bad debt of 115 basis points of revenues, and an additional 75 basis point reserve specific to Party City and Bed Bath and Beyond.
Speaker 5: It appears a party city will emerge from bankruptcy in the near term and we will not be losing any locations.
Speaker 5: Our assumption is that Bed Bath is in liquidation mode and that we will not collect any additional rent going forward.
Speaker 5: It's important to note that of the total 75 basis points of potential disruption, only five basis points was experienced in the first quarter as Bed-Vas continued paying rent on the vast majority of its locations.
Speaker 5: For this reason and others, we caution against annualizing our first quarter results.
Speaker 5: Specifically, the first quarter benefited from items that are not budgeted to repeat themselves during 2023.
Speaker 5: As it relates to the same property in Hawaii, for the balance of the year, we are assuming no additional rent from bed bath, and elevated bed debt run rate, and lower overdraft.
Speaker 5: Consistent with last quarter and based on comparable 2022 periods, we anticipated very strong first-quarter same-property NOI growth that moderates over the course of the year. Outside of the same-property NOI, the first quarter benefited from lower interest expense related to retired mortgage debt and the previously referenced non-cash contribution.
Speaker 5: As we demonstrated last year, it's early and a lot can happen between now and the end of 2023. We are extremely confident with respect to the things we can control. Prudence dictates that we remain conservative with respect to the things that we cannot control.
On the balance sheet front, we retired $162 million in mortgages using a revolving line of credit and cash on hand.
Over 96% of our NOA is now unencumbered. Subsequent to the end of the first quarter, we closed a $93 million mortgage at KRG Share, secured by our one Loudoun residential joint venture project at a fixed interest rate of 5.36%.
KRG is a 90% owner of the 378 multifamily units at Long Loudoun, which are currently 96% leased and continue to outperform our initial underwriting.
The proceeds in the mortgage were used to pay down our $1.1 billion revolving line of credit which currently has a balance of $68.5 million. We are a battle tested management team that has navigated a variety of challenging cycles but never with a balance sheet of this caliber. That's even at 5.3 times.
Depth service coverage ratio 5.2 times.
over a billion dollars of liquidity, minimal floating rate debt, a wealth-diagram maturity schedule, deep banking relationships, a huge unencumbered asset pool, and multiple capital sources.
These formidable attributes inspire a calm confidence across the entire organization and allow us to remain intently focused on operational excellence.
Thank you for joining the call today, operator. This concludes our prepared remarks. Please open the line for questions.
Thank you. At this time, we will conduct the question and answer session. Here's a reminder to ask a question.
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Our first question comes from Craig Mailman from Citi. Your line is now open.
Hey, guys. I just want to clarify. So Heath, you said that Bath was current in one queue, but you guys are assuming zero rent for the balance of the year. Did they reject all the leases in that first motion or, you know, have they paid anything in April ? Just kind of curious.
why you're assuming nothing from end of first quarter through back to the year.
Yeah, correct. So we've had a total of four locations that have been rejected to date. And they did pay a handful of locations for April rent. But just as a matter of conservatism, we're just assuming that from this point on, we're not going to see any rent. I mean, in reality, they did get a $240 million dip.
So we're likely to see some form of rent in terms of post petition. But again, for the purposes of our guidance, we just assume that we're not going to see another dollar from this point forward.
Okay, and then could you just give some sense of where you guys are in the backfill process? How many of you guys have gotten back and where you are in the process?
Sure. I'll talk about it a little bit and Tom can chip into. I mean, bottom line is we have no different than everyone else. There's a strong desire by retailers to have a chance to leave these spaces. So our objective right now is to make really good decisions around which retailers. So to be honest with you, we're less focused on.
how fast it happens and more focused on the quality of the tenants that we put in. But one of the uniqueness of Bed Bath is this was a tenant that at one time, was one of the premier tenants in the business. Of the 22 locations we have
19 of them are 100% leased in the anchors, right? So this is a great opportunity for a great tenant to have a shot at this space. I think another one of them is a ground lease and the other two actually have both bed bath and buy buy baby. So, I mean, my focus macro is that we're taking our time, making great decisions with capital.
our benefit and one of the keys for our company is that we'd be ready for all this so we have our development teams, our construction teams going through drawings, understanding rooftop units, panels, etc. so we can move through the
process and construction as quickly as possible. But as John said, it's ultimately, this is a great opportunity. It's about getting the right tendency in for the long term and pushing spreads and strong returns.
So just from a I know you guys don't have 100% visibility, but if you assume they're all non rent paying going forward kind of what do you think the commencement timing is on backfill just given the visibility you have on the demand. Sure, I mean, I think it's not that different from what it what it usually is. Craig. I mean, these.
of course, if a lease was bought, then the rent commences very quickly. So I think what we're doing is we're just making very conservative assumptions within our guidance. So let's start there. But secondly, assuming we take the space back, generally speaking, it's 12 to 18 months. That's the way it's always been and.
anchor leasing and as Tom said very well, we're not on the clock. We don't think that way. We're on the value creation clock. So that's why you're not gonna get me to say how many exact deals we have.
lease negotiations, LOIs, et cetera. That doesn't really matter. What matters is, you know, we will have, this is a once in a long time opportunity to be able to bring in tenants that are gonna really make a difference to the particular property. You know, and we have multiple interest parties on multiple spaces. So.
One moment as I prepare the next question.
Our next question comes from Todd Thomas of KeyBank. Your line is now open.
Hi, thanks. Good afternoon. I guess just following up on that line of questioning. You know, you did very well with the Stein mart vacancy and back fills over the last couple of years now. Can you talk about the spreads that you anticipate on on bed bath back fills and. You know, John , you just characterized it as sort of a once in a life.
two locations you have.
Yeah, Todd, I don't think it's too different than what we've been experiencing over the last couple of years, as we said in our prepared remarks. If you look at the last two and a half years, we did 58 anchor deals, 18% rent spreads, and 20% return on capital.
I think we want to make sure you understand that it's not a one-dimensional exercise. You've got to get both. I mean, we want a healthy spread, but we also are probably more focused on making sure that the capital that we're putting into these deals is we're getting a significant return and the credit quality. So it's all the
say it before, if this was going to happen, this is a very good time for it to happen in terms of what's going on in open-air retail. And then Todd, just a couple other things. One is diversification. We've been talking about diversification quite a bit.
making sure that our reach throughout the tenant universe is very strong instead of just taking the first inbound calls. So that's a priority. Then you also asked about the probability of potential splits.
I mean one way to look at it is we did 58 box deals in the last two and a half years and split only one of those. Now that's a pretty remarkable ratio. There's a possibility that we have splits but looking at really looking at our prospect list and where we are in the process of all these deals.
to bring in let's say a smaller specialty grocer and you know put someone in conjunction with them and we think that's the right thing to do for the center will do it. I really believe that you know the leverage is on our side in terms of making these determinations.
because of the supply demand kind of characteristics that we outlined, but certainly we think it'll probably most of the deals will be with individual users, but there may be a few where we say we'd prefer to split it.
Okay, and then in terms of investments, do you see opportunities beginning to surface from maybe private owners with with bed bath space? Maybe some other vacancy that might not have. the capital to reinvest in their centers or
Is that not likely to result in much deal flow and how big is your appetite here to find new investment opportunities?
Well I think I think the investment market is pretty volatile right now. Obviously there's there's disruption in the capital markets so I would say that right now you're probably not going to see a lot of that. I I still kind of believe that perhaps in the second half or maybe even more towards the fourth quarter of this year.
there would be more opportunities. But again, we're gonna be very selective. We have a very, very strong portfolio and we wanna continue to own the best real estate. I made mention of the fact that when we make investments, we make investments in the land.
That is permanent and we think we're pretty good at making real estate decisions. So probably, Todd, some opportunities will arise, but right now it's a little slow on that front, just obviously with the disruption in the market. Okay, and Heath, real quick on the guidance.
The two pennies that were included in the revision, so one penny related to the theater negotiation, one penny of non-cash rent, were both of those fully realized in the first quarter?
or is that, you know, was that partially recognized in the first quarter and something that's going to continue, you know, in the run rate throughout the balance of the year? Yeah, the non-cash event was realized in the first quarter, Todd. You may see some other non-cash related to some of the bed bath closures as those happen. And then the regal rent, that's something that we'll realize over the course of the year. So that's the reason why we're here.
of 2025 and then they would have an option to go back to their their standard deal but we set it up to give us optionality both on that situation as well as potentially maximizing the value of land.
Okay. All right. Thank you. Thanks.
Okay, all right. Thank you. Thanks. One moment please.
Our next question comes from Floris Van Dykem from Compass Point. Your line is now open. Your line is now open.
Great. Hey guys, thanks for taking my question. Morning. Hey, I wanted to
delve into something regarding your small shop occupancy. Obviously it's it's ticked up. It's at 98.8 percent I think. What was your peak and and if you could touch on maybe a little bit of you know of the you know what is what you think
is going to happen there over the next couple of years, particularly how much more upside do you see in that as well as your anchor? And because one of the things that your small shop typically would have where your rents are double your anchor rents, and I think you're actually getting more small shop rent today than anchor rent, but your fixed rent bumps on your small shop should be higher. Maybe if you can touch on a couple of those elements in your portfolio.
dive into it, but if you look at actually if you just look at our quarter that we just had, you know, we did 144 comparable deals. And, you know, the majority of those deals were small shop deals, right? 121 of them were shop deals. So the shop business is extremely active.
but I'll have Tom dig into it a little more. So to get to your point, the high level mark for shouts was 92.5%. So right now we're at 89.8. So there's about a 270 basis point spread there.
So there's no question. We know that we can get back to that number. It will take time. But the bottom line is there's a tremendous amount of growth ahead of us. We did fall back 20 basis points and that was really kind of more of a seasonal scenario. But we expect...
we expect to pursue that growth and continue on our path that we have, particularly through all of 22. So one other point you mentioned, Floris, is that the spreads are better. And John mentioned there's no question that that should buoy growth as well as we work through that.
that spread differential of 270 basis points. The other important part there, Floris, and I've said this a lot, but on the shop side, obviously, the rent commencement is much quicker than it would be on the box side. To the extent that we continue our pattern of leasing.
then that can help buffer some of the NOI lost, assuming the bed bath situation is the way we project it. And one more thing, Floris, that 92.5%, that was something we achieved at the end of 2019. It's important to note we didn't view that as a ceiling. So yes, that was at 92.5, that was the highest in the company's history, but we were planning on growing that in 2019 and beyond.
And is it correct to assume that your fixed rent bumps on your shop space are somewhere in the neighborhood of 250 basis points on average versus your anchor space probably closer to like 100 basis points?
Well, it's correct to assume that you know generally in that range but we are extremely focused on that particular part of our business right now, Flores. And you know we're actually I think probably maybe more focused on it than the most because it's very important that we take this opportunity.
It's a major point of discussion. And I think the retailers understand and the environment that we're in, especially when it relates to supply demand characteristic, they're gonna have to pay more than 2.5% a year on the small shop side.
So would it be fair to say that new leases are done around 300 basis points and six cameras, probably 4% somewhere in that range? You got to make your own assumptions on that florist, but you know, we can't give you exact right now.
Got it. Okay. Let me let me my other question had to do with the the regal lease and I know that they're paying rent and but obviously I, you know, we've written and I think, you know, other people have speculated the that land is more valuable as something else besides the theater. Where do you stand in your negotiations with the authorities in terms of getting that rezone for
You know, Forrest, from a timing standpoint, our team has been out there two to three times already meeting with Ontario. And the positive is that from a comp plan perspective, they very much would like to see this property redevelop. So I think we're working with a group that understands this is a great opportunity.
not only for this piece of land, but for the community as a whole. So the apartment land appears to be the best approach, but we're keeping our eyes open and we'll likely take looks at various suitors for the property, as well as assessing ourselves.
We're in the site planning phase with staff right now and we are moving nicely. And that's why this deal after 2025 was really a perfect scenario for Kite. It gives us the opportunity to get these things accomplished within that time frame.
Great, thanks guys. Thanks. Thanks.
Great, thanks guys. Thanks, thanks Floris. Thank you. One moment for our next question.
Our next question comes from Alex Goldfarb of Piper Sandler. Your line is now open. Hey, morning out there. Good morning. After?
Our next question comes from Alex Goldfarb of Piper Sandler. Your line is now open. Hey, morning out there. Good morning, afternoon. Just great to be here. Sorry. Yep.
Thanks, John . So a few questions here. First, property insurance, favorite topic of apartments this season. You guys have a meaningful amount of sub belt exposure. Have you seen, what are you guys seeing for property, you know, insurance increases and
really thinking of the pass through to your tenants, especially the smaller mom and pops, can all of those tenants stomach the increase in premiums that we're hearing about?
Hi, Alex. It's Heath. First of all, good news is it's a very recoverable item, but to your point, yes, I mean, premiums have increased. Our renewal date is 12-1, so we already went through that last year. But, you know, based on the hurricane season last year, as you can imagine, especially in Florida, we did see some significant increases in property insurance.
Good news is that we do have a captive insurance program, so we were able to kind of get creative with that to really diversify our risk and try to minimize the increase to the tenants. But sure, it's a real issue and it's something that we deal with. And we do the best that we can. We spend a lot of time with our insurance providers. We travel, we meet with them like we meet with investors to give them some conviction around ensuring kite. One thing I think that made a lot of difference to them
one of our strengths.
that in the open air platform, our total cost to operate is very, very affordable when you look at cam taxes and insurance. Because of the simplicity of the buildings. I think it's actually creating even a better look through. I think it's actually creating even a better look through.
when retailers, as we mentioned, as they become less agnostic around a particular use and they're going to look at the real estate and they look and see that the cost to operate in our real estate is well below what it might be somewhere else.
This is just another thing that's really, you know, inuring to our advantage right now. So what you're saying, John , is you guys haven't seen any impact of smaller tenants who said, hey, you know, I can't stomach that. Okay. No, no, not at all. Not at all.
Next question is on the bed bath, it sounds like we won't know for some time how many of these bed baths are bought in auction versus collectively, you know, the REITs get back. Sounds like there's healthy, you know, 20, 30 percent type rent marks, but on the ones just in general.
What's the average lease term remaining on the bed bath boxes? And I'm assuming that for these tenants that really want to into certain centers, they don't care if there's only two years left. They'd rather get in the space and try to hope that they can renew rather than pass by. So just want to maybe some of your game day theory on sort of one.
the types of leases that the auction, that would be popular at the auction too, collectively, how much average term is left so that even if you does buy a, I'll let you go. Sorry. Yeah, I don't have that in front of me right now, Alex, but the bottom line is, you know, whether the primary term there's, you know, if you had the, I have to guess right now, five or six years.
But certainly that you know tenants will be looking at you know length of term, you know primary options, also the rent and the market, right? Is this rent viewed as a below market rent? Is it not? So there's a lot that goes into that and remember we also would have the ability to be in the process of buying a lease if we felt like we wanted to.
control that or protect that. So there's a lot to play out, which is why I think the way we did guidance was the right way to do it. Just take it off the table and let's see what happens. And then Alex, I think you'll also see a hybrid of what we're all talking about. And that's a situation where a retailer will contact us directly, which has occurred.
and say, hey, look, we could go out and purchase these. We'd rather enter into a new lease. They, of course, would pursue tenant improvement dollars. So we'll be seeing a lot of different scenarios as this begins to unfold. Which is another reason that we said this is not a game about how fast you can get there.
Our next question is from Michael Muro of JP Morgan. Your line is now open. Your line is now open.
Hi, Keith, you talked about a couple of moving parts with some of the bed bath boxes, but can you tell us what in one queue, what was the total revenue, including recoveries, ballpark, that was in one queue that we should assume is heading out in two queue?
First and then the second question is Looking at some of the future redevelopment opportunities. What are some of the triggers that you look for to start to activate some of those projects? I think we're going to answer that the second part of that question.
First, which is what are some of the attributes we're looking for in terms of redevelopment. I'll turn it over to Tom.
So, from a redevelopment standpoint, you know, we're going to be looking at quite a few different factors and, you know, we've been doing this a long time, decades and decades. So really, the sky's the limit in terms of the optionality.
But that will of course be one of the key things that we study as part of this. And once again, we get back to the fact that this takes time. And we're going to make sure that we do it right and end up with the best configurations as we go forward. And then on the first part of the question, Mike, the answer is it was about a penny of FFO, so a little over $2 million dollars what we collected from that.
in the first quarter, which is why the disruption for the last three quarters is around three cents. It actually, Mike, it's John , it actually gives me an opportunity to say that if you stop and think about it for a minute, so, you know, Bed Bath was our eighth largest tenant, 1.4% of revenue.
So you're talking about, what is that? A little over $8 million. And we're saying we got paid for one quarter. We're assuming they're out for three quarters. And even with that hit, we just raised guidance a couple cents over what it was last year. What we did.
opportunity to highlight the strength of the business. Got it. Thanks for the color. Thank you.
Thank you.
Thank you. Thank you. Thank you. One moment as I prepare the next question.
Our next question comes from Anthony Powell of Barclays. Your line is now open.
Hi, good afternoon. A question on small shops and regional banks. Everyone's worried about regional banks today and recently, given all the failures. And are you concerned about the ability of small shop tenants to either access credit or to expand? Maybe not now, but later this year and next year, given kind of the anticipated tightness on the lending standards from regional banks.
I mean I think obviously it's hard to know where this goes right now Anthony but to date there has been no indication of any slowdown in business formation and expansion of franchises you know remember a lot of our small shop deals are national deals
with large credit worthy companies. So the actual mom and pop piece of it is pretty small. I think it's around 10% maybe of the shops. So we just aren't seeing it as it relates to regional banks.
We'll see how that plays out. I mean, I think there's so much going on right now that to try to draw long-term conclusions is probably a fool's errand, but so far so good. And look, as we said earlier, we have opportunity in the shops and we're seeing tremendous volume right now. So we actually feel pretty good about it. Thanks, one more. Sorry if I missed this, but what drove the 10 basis points to climb in the bad debt assumption guidance let me just pay the moment.
What are you seeing from tenants in terms of either bad debt or discussions beyond, kind of, that's beyond a party city?
So Anthony, the 10 basis point decline is really a feature of taking the actual bad debt that we experienced in the first quarter and assuming the same 125 basis points for the balance of the year. So when those blend together, that puts you at 115 basis points of bad debt on a go-forward basis.
Have any other retailers popped into the watch list or any commentary on tenant health? That would be great. No, I mean, I think the list is generally pretty much what it's been for a while, Anthony. You know, we've been talking about Bed Bath and Party City for a long time.
These things take a long time to play out. So the current environment is still very healthy for retail. And our centers are very busy and we made mention of kind of the shifts that have happened post COVID. All these things that have happened post COVID have been very, very fundamentally good for open air retail. And I think there's even more of that to come in the future.
So, right now, we aren't seeing a tremendous change there. But we also mentioned it's a Darwinian business. There's going to be retailers that don't innovate enough and they will be moved aside by the ones that do. And the great thing is, we're the landlord, you know. We're not running those businesses. We're running our operating...
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Seems the last question has withdrawn. Oh, no, there we go. They are back. Our next question comes from Lizzie Doikin of Bank of America. Your line is now open. Hi. Good afternoon.
I was hoping to ask about the. Leasing volumes and activity this quarter, which 144 leases 831 square feet. It seems a bit lower from last quarter. And it looks like that was a function of fewer renewal.
I just wanted to see if, you know, if that really if you're seeing moderation just from. Levels of outside demand, or maybe if you could characterize the activity recorded versus what you expected. And, you know, what, what would be assumed as more normal. I think that would be Test
Yeah, this is Heath. I'll let Tom talk about sort of the type of tenants that we're talking to, but the small shop demand is still extremely strong. And you're right, the lower volume is really a function of renewals, and that's really timing. As you notice, we still have 90% retention ratio. So just for the way that the renewals are sort of shaking out over the course of the year, they're more back-end loaded. So I wouldn't read too far into the actual square footage volume in terms of what it means for tenants.
So we have really brought that down and it's also a function of our lease percentages, you know, moving forward and being in the right places. But you know, from an overall perspective, we're really focusing on specialty grocery. That is a huge component John mentioned about it and those come in a lot of different.
different sizes and different layouts. The sports industry is, as you've seen us, we've been productive on that. The furniture home store business, and then of course the all powerful.
Discount users are very active as well. But if you look at some of the deals that we've done as of late, you have all the fresh market, Total Wine, Dick's, Home Goods, it kind of falls into that category of there's really quite a few tenants that we have the ability to draw from and these are people that we have very close relationships.
and the fact that our box inventory has drawn down from a very high level previously.
box inventory has drawn down from a very high level previously. Okay, makes sense. Thanks.
And I was wondering if how much of the improvement in your SAME store NOI guidance sum could have been attributed to the better expense growth we saw in 1Q. I'm wondering if that's just an easier cost that we saw year over year.
or how much of that is the function of the initiatives you've taken to reduce costs or even cost energies coming from the RPAI merger. Thanks.
I think honestly the increase in the same store guidance is really a function of it's an increase in your base rent, it's an increase of your overage. So those are the main drivers of why the same store is going up. A lot of that is obviously, you know, as our occupancy improves, etcetera, it's higher retention ratio than we originally budgeted. So it's all these really good high quality items that are causing that same store and wide assumption to go up by 25 basis points.
So comment down on the expenses. Okay, great. And just one last one from me. I noticed, I know recovery on insurance was touched on a bit earlier, but it looks like the recovery ratio ticked up just a little bit on retail properties, but this still seems low from last quarter. Is that mostly a function of the reserves or BetBath and beyond?
and then what might be driving a better expense recovery for the whole portfolio. I think that's occupancy, right? That's going to drive higher expense recovery ratios. And again, we're also doing a great job with our new leases, and we're seeing the benefits of our fixed-cam initiative really flowing through as well. So as we get more and more tenants signed up for fixed-cam and more and more tenants come online with fixed-cam and their lease.
more about fixed CAM and obviously as you get lease up to, but you do have on the NOI margin, that's where you have the opportunity to have your platform kind of differentiate itself.
which we do. Great, thank you. Thank you. Thank you. At this time I would now like to turn it back to John Kite for closing the mark.
I just want to say thank you for joining us today and look forward to seeing you soon. Bye.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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