Q2 2023 Kite Realty Group Trust Earnings Call

August 1, 2023

[music].

Okay.

Good day, and thank you for standing by and welcome to the Q2 2023 Kite Realty Group Trust earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the special need to press star one on your telephone.

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Please be advised today's conference is being recorded I would now like to hand, the comps off of your speaker today Bryan Mccarthy. Please go ahead.

Thank you and good afternoon, everyone welcome to Kite Realty group's second quarter earnings call. Some of today's comments contain forward looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties.

Actual results may differ materially from these statements.

For more information about the factors that can adversely affect the 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 available on our website for reconciliation of these <unk>.

non-GAAP performance measures to our GAAP financial results.

On the call with me today from Kite Realty group.

Chairman and Chief Executive Officer, John Kite, President and Chief Operating Officer, Tom Mcgowan Executive Vice President and Chief Financial Officer Heath Fear Senior Vice President and Chief Accounting Officer.

Fuel and senior Vice President capital markets, and Investor Relations Tyler Henshaw.

I'll now turn the call over to John .

Alright, good morning, everybody. Thanks, a lot Brian .

Turning to second quarter <unk> delivered outstanding operational results.

While continuing to fortify our best in class balance sheet.

The demand for our high quality space remains strong.

And we are in a prime position to continue to drive pricing improve our overall long term growth profile enhanced tenancy and further grow our revenue and cash flow.

Turning to our results, we generated <unk> per share of <unk> 51.

Beating consensus estimates by <unk> <unk> per share.

Our same property NOI growth for the quarter was five 7% as compared to the same period in 2022.

Our outperformance in the first half of the year is allowing us to increase our NAREIT <unk> guidance by <unk> <unk> at the midpoint.

We're also increasing our same property NOI growth assumption by 75 basis points moving from 275% to three 5% Keith will provide more details around our quarterly results and updated guidance.

We signed 190 leases representing over one 3 million square feet, producing a sector, leading 14, 8% blended cash spread on comparable new and renewal leases.

Excluding the impact of option renewals, our blended cash spreads were 24%.

More importantly, <unk> earned a 32% return on capital for new leases.

As Ive emphasized previously leasing existing space provides the best risk adjusted return for our invested capital.

While our ability to drive pricing on initial rents remained strong.

Taking this opportunity to redefine our long term growth trajectory.

Recognizing the favorable supply and demand dynamic in open air retail at the outset of the year, we focused our leasing efforts on implementing higher fixed rent bumps and CPI adjustments.

I am pleased to report that through the first half of 2023.

We have been extremely successful with this initiative.

80% of our new and non option renewal leases signed have fixed rent bumps that are greater than or equal to 3%.

And 40% of those leases have CPI adjustments.

The average annual fixed rate fixed rent increases for new and non option renewals in the first half of 'twenty three was two 4%.

<unk>, both our small shop and anchor tenants, which is 90 basis points higher than our portfolio average.

We are laying a solid foundation to improve our long term embedded growth profile.

Based on the current tenant demand I can't think of a better time for <unk> to upgrade the merchandising mix at our centers.

Dave and a different leasing environment and liquidation of bed Bath could've been a real jolt to the sector. Instead, it is providing to be one of the best opportunities we've been afforded.

I was adamant about maximizing this opportunity by prioritizing the best solution over the fastest solution.

That said I'm pleased to report that we are making great progress back filling those boxes at higher rents with better tenants.

The pool of tenants to backfill, the attractively size and well located boxes as deep and diverse.

Thus far we're negotiating with 15 different brands across the retail spectrum.

Including grocery sporting goods, Big Big box wine and spirits home furnishings and off price apparel.

Keith will provide more detail on the current status and we look forward to providing updates as we progress.

Sure.

Our success in enhancing the merchandising mix is not limited to the bed Bath basis.

Year to date, we have opened two grocery stores in our portfolio and have an additional four grocery stores and the signed not open pipeline.

In addition to adding grocers to the portfolio. We've also have several opportunities to add multifamily units to our mixed use and lifestyle portfolio. We currently have an ownership interest in nearly 1700 apartment units and have entitlements for an additional 5000 units.

We look forward to further densify our properties at healthy risk adjusted returns and partnering with best in class operators when appropriate.

The <unk> team continues to capitalize upon the demand for open air retail and the resiliency of our cash flows.

Our efforts to enhance our merchandising mix drive pricing power and increase our long term embedded growth.

Growth profile will undoubtedly increase the value of our open air centers.

We have often talked about the optionality afforded to owners of high quality real estate that same optionality is exponentially increased when supported by unparalleled operational acumen.

And our best in class balance sheet with substantial liquidity, we're extremely well positioned to seize the opportunities that lie ahead.

I want to take a minute to really thank our team for their continued dedication outperformance and commitment I will now turn over the call to <unk>.

Good afternoon, I wanted to start by thanking our operational team for once again, allowing me to share the good news.

Order after quarter, it's been a privilege to report on your considerable accomplishments.

<unk> exceeded expectations by generating NAREIT <unk> per share of <unk>.

<unk> 51 during the second quarter and $1 <unk> year to date, the quarterly outperformance was primarily driven by higher than anticipated same property NOI, which grew by five 7% during the second quarter and six 1% year to date.

During the second quarter increased occupancy and rent escalators were the primary driver of our same property NOI growth with a 360 basis point increase in minimum rent and net recoveries.

140 basis point increase due to lower bad debt and.

And a 70 basis point increase in overage rent and other revenue.

As John alluded to earlier, we are raising our NAREIT <unk> per share guidance range to $1 96 to $2, representing a three <unk> increase at the midpoint.

Two pennies are attributable to a corresponding increase in our same property NOI growth assumption as a result of lower bad debt payment of post petition rent from bed Bath, <unk> beyond and higher overdraft or the.

The other penny is related to an unbundled determination fee our updated guidance incorporates the following assumptions regarding the back half of 2023, we are assuming no additional rent from bed Bath <unk> beyond specifically, we expect the gross rent from bed bath locations to be <unk> less than will be collected during the first half of the year.

We are prudently assuming bad debt to be 125 basis points of revenues for the balance of 2023, which when combined with the actual bad debt experienced in the first half of 2023 equates to 85 basis points of revenues for the full year.

We are anticipating a deceleration of fee income as the first phase of Hamilton crossing project nears completion, we are not modeling any additional termination fees.

And while we sold two assets in the quarter, we anticipate the impact of transactional activity will be essentially neutral to earnings as the blended cap rate on the transactions as well below the interest income offset.

Our balance sheet continues to be in an enviable position with net debt to EBITDA of five times debt service coverage ratio of 553 times, 97% of our NOI is unencumbered over $1 2 billion in liquidity and Undrawn revolver minimal floating rate debt, a well staggered maturity schedule.

And multiple capital sources. These metrics allow our team to remain intently focused on operational excellence and provide us with the flexibility to immediately pivot and capitalize should a compelling opportunity arise.

We have only $95 million of debt maturities remaining in 2023, which will satisfy with cash on hand and proceeds from our line.

As for the $270 million coming due in 2024, we continue to remain opportunistic as it relates to the unsecured debt markets. The good news is that our indicative spreads have materially tightened recently, which further verifies our patient approach.

Before turning the call over to Q&A I want to take a moment to further elaborate on the progress, we're making with the backfill and the bed Bath <unk> beyond spaces.

We ended the first quarter with 22 units, representing one 4% of ABR and 522000 square feet of GLA.

Thus far three units were acquired in the bankruptcy auction six units are either leased or under a signed LOI.

And then 11 units are in LOI negotiation as John mentioned, enhancing our merchandising mix with 15 different brands generating strong spreads and returns on capital and further burst bolstering the durability of our cash flows and a tremendous opportunity for <unk>. Thank you for joining the call today operator. This concludes.

Our prepared remarks, please open the line for questions.

Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.

Okay.

Our first question comes from Todd Thomas with Keybanc capital markets. Your line is open.

Okay.

Yes, hi.

Good afternoon, John first question you.

You opened up.

By commenting that Youre working to drive <unk>.

Kris and the long term growth of the portfolio and talked about some of the success that you've realized this year I'm just curious what you think the impact of some of those initiatives.

Are having on the stabilized growth of the portfolio today, maybe at full occupancy.

You think about it that way and how that compares to maybe five or 10 years ago. And then is there is there a target that youre working to achieve in terms of that that long term growth rate for the portfolio either in terms of the escalators or otherwise and when do you think you might achieve that.

Well I think I mean, as you know Todd is it takes time for that to work through the portfolio.

But I mean, there is no question that the embedded rent growth that we are that we're achieving in 2023 as I mentioned very specifically.

<unk> significantly above where the portfolio average was almost 100 basis points.

And I hope you caught when I was talking about it in terms of what we've achieved this year, we were including both the anchor and small shop space, but the reality of that is that.

The ability to really drive that growth.

And have it have it come to fruition more quickly is going to be in the shop space because of the quick returns.

And the better ability to get those three.

Three and 4% annual bumps and then candidly the CPI adjustment as an insurance policy.

We've also added to that and that used to be fairly and when I say used to be a long time ago that was a very typical part of the business.

And over the last say.

Got 10 years, there wasn't a lot of talk about that.

We set it out in the beginning of the year I mean, we set goals in the beginning of the year and that was absolutely one of the goals and our team delivered it and so without getting extremely specific and giving modeling.

Information I mean, it's going to help because there is no question and more importantly.

It's a function of the interest in open air retail alright. So you can break down a lot of different things, but when you look at our non option renewal spreads.

Okay and you look at this part of our business that we're able to now function now pull in these annual bumps of 4% or 3% with the CPI adjustment that tells you. The business is extremely healthy and I know theres a lot of talk out there about.

How is how is the health of the business. The health of the business is very strong for us in particular it is very strong.

Okay are you having success driving annual escalators with tenants.

With anchors maybe in certain categories and with certain credits that have historically pushed back on escalators or are you seeing those changes are realized there.

I'll comment and I'll have Tom jump in I mean from my perspective.

Absolutely we are having success, having those conversations that being said I mean, the anchor side of the business is more difficult.

To get that done.

So historically would we be happy with a 10% increase after five years and an anchor deal that would be pretty typical now we're trying to push that a little further.

So it's not as.

Readily available because of the way the turnover happens, we just have less turnover there, but Tom you want to comment too.

Think we have to take a look at this in steps and we're in the we're in the early stages of trying to educate and work with the larger box tenants.

Instead of no pumps and five maybe we take a look at our shorter term of three and then when we start the bonds.

Or he is in or using different tools to get to the same place, but it will take us longer but we're very much focused on not only the small shops, but the anchors as well and as long as we have this focus as long as the team is ready to go we expect to make nice advances.

Okay.

And then Heath.

A question for you the portfolios lease rate.

Decreased 70 basis points versus last quarter, but build the occupancy was unchanged at 92, 3% and can you speak to that in light of the bed Bath boxes that you recaptured during the quarter and also maybe provide a little bit of detail.

Around the expected trends for the portfolio is leased and economic occupancy rates moving into the second half of the year.

Sure So titles I know the lease rate.

It is basically a point of time at the end of the quarter. So youre looking at that day are saying. This is how much is least whereas your economic occupancy represents your average occupancy during the quarter. So the full impact of the bed Bath is running through your leased rate, but it's not running through your through your economic occupancy. That's why you also saw a compression on your spread between our leased and occupancy.

So as we move into the back half of the year Youll see the occupancy start to track the least in terms of its fallout from the bed Bath. So that explains why that Delta happened, Matt explains why were flat in the occupancy.

But we are having a more decline in the leased rate in terms of the trajectory Todd as of the.

As of the first half we only had eight of the bed Bath were out of our occupancy and lease numbers where to add an additional 14 to that coming into the third quarter. So youre going to see or are leased and occupancy rates sort of trough into the third quarter. So putting some numbers around it it's about 120 basis points just bed Bath alone. So again, you'll see that drop in that.

Over the course of time as we start to sign up those bed Bath <unk> beyond leases youre going to see number one our <unk> Gro and you also see that spread between leased and occupied grow as well. So that's kind of how to think about the balance of the year.

Okay. That's helpful. All right. Thank you.

One moment for our next question.

Our next question comes from Craig Mailman with Citi. Your line is open.

Hey, guys, Keith maybe just to follow up on Todd's last question on the occupancy as we think about kind of isolating the bed Bath, which you did 120 basis points again.

During in the commencement of the <unk> pipeline.

I mean, how much of that would offset kind of this drag from bed bath kind of hitting the numbers in the second half.

Yes, so Craig we don't we don't guide to occupancy at the year end, so that thats kind of where youre going with that so I would tell you that I don't think the.

The lease rate is not going to move because obviously those are already signed in terms of the economic occupancy I don't think it's going to catch up to 420 from the bed Bath. So I think we will be ending the year, probably at a spot that's lower than where we started the year.

But that's really as much direction as I can give you because again the 120 basis points. Obviously is a lot of movement to be happening in a single quarter.

Okay. That's helpful.

And then John I know you said over over the past few quarters here, it's more about maximizing <unk>.

Rather than.

Speed to lease up on on the bed Bath, but sounds like you guys had really good traction.

From a commencement perspective, maybe relative to where you thought two quarters ago kind of what do you think updated timing is given how much you have under LOI than the other 11 theyre kind of in negotiations what do you think.

The timeframe is to get that revenue back up and running and then maybe also just run through how much of those are single tenant backfill versus maybe splitting the boxes.

Yes, I mean, I don't think the overall trajectory has changed much Craig in the sense that.

What we've experienced over the last several years I mean, we've done what 60 something boxes over the last few years.

Generally speaking when you sign a lease it's going to take 12 to 18 months for rent commencement and it's going to depend on how much work you're doing in that space.

So I know some people say it happens faster than that but those are rare.

It has to be in as his deal and not a lot going on in terms of work. So I think we're still on that trajectory of as the leases get signed it's approximately in that 12 month period.

And then I would say in.

In terms of splits right now the majority of the conversations as they have been for the last two.

Say four quarters.

Our tenants wanting to take the entire space or us requiring them to take the entire space. More importantly, now couple of instances, where we may want to subdivide and for merchandising mix and Thats kind of what I meant by this is not a speed game.

And so but the splits are pretty rare I mean up to 63 deals we've done in the last.

Whatever a couple of years.

We split one which is kind of unbelievable and it goes back to the theme.

Open Air is strong.

Okay.

And then you guys got leverage down to five times you mean.

From a long term perspective kind.

Kind of what's the goal here.

How much capital do you kind of keep dry here for potential opportunities.

Kind of thoughts on balance sheet management.

Yes, Keith.

Want to talk about this too good but from my personal perspective, we're at five times.

Ebb and flow.

To quarter, a little bit but not materially.

So we're at the low end of our range that we've set out as a goal which is pretty fabulous.

We've de Levered on basically a turn and a half since the merger.

Another beautiful benefit of the Fabulous deal that was done and so were we wanted to make the point that our balance sheet is.

One of the top two in the entire sector and that affords us this ability to continue to operate at a very high level, but also if an opportunity arises then we're one of the few that probably can act upon that without any material.

Issues with our balance sheet, So we love where the balance sheet as it is a very strong position.

And we want to continue to be in the low to mid fives like we've been saying.

And again that affords us long.

It's a optionality.

Keith do you want to.

Great answer.

Did you want to add anything or.

Nothing to add thanks, I took the words out of his mouth turned on my math correct.

Our balance sheet is in great shape lots of liquidity.

One quick one here is there anything legacy RPI related on swaps amortization thats running through the numbers.

If there is kind of how long does that.

What's the tail on that until that turns off.

I'd have to look at our maturity schedule and figure out what's one of the RPI debt instruments are swapped into how long they run through so I think nothing material running through it I will tell you. The one thing thats continuing to run through the P&L. The swap as you recall in 2021, and we took out that forward that was $150 million.

Resulting in about a $3 million benefit.

Every year to our interest expense one thing about it is a little lumpy. So you may have noticed there is a sequential sort of.

Increase in interest expense from the first quarter, the second quarter, because only realize that $3 million, we realize half of it in the first quarter and half of it in the third quarter. So it gets a little lumpy, but nothing a call or those with those swaps.

As Youre thinking about Craig and again, we can offline to take a look at one of those things exactly mature or do you want me to quantify that for you further.

No. That's helpful is there anything to call out sequentially on interest expense from Q2 to three in Q.

Again other than <unk> that youre going to see that benefit of that one $5 million again, and then obviously there is a slight increase in sulfur based on recent moves by the fed so to the extent that we have in floating rate debt, you will see a small uptick but nothing material quarter over quarter.

Great. Thanks, everyone.

One of them before the next question.

Our next question comes from Floris Van <unk> with Compass point Your line is open.

Hey, guys.

For taking my question.

I guess, let me start with.

John I mean, you sort of mentioned this in some of your comments as well.

Raising the long term growth rate of the portfolio and part of that obviously is through higher fixed rent bumps kick down the shop space and also how you changed the anchor bumps going forward.

I think one of the other things that is.

Oftentimes overlooked is you.

Your your move to fixed Cam.

It's totally one of the earliest in the shopping center space and.

We've seen this play out 20 years ago 25 years ago in the mall space, where Simon in GGP, where the sort of impact I think GDP was the first one to do it but assignment followed shortly thereafter in terms of going to fixed cam.

Sure.

So I'm going to stop disclosing because the profit margins are so so large on that.

Of the business, maybe could you give us a little bit of an update on how fixed cam is going what percentage of your portfolio is that and what kind of bumps are you getting in terms of escalators and how you see that enhancing your growth going forward.

Sure.

I guess he brought the.

Fixed Cam initiative from GGP.

Thankful, but the reality is we're doing very well there.

Gotten back.

Much quicker than we thought when we when we did the merger we were around 50% of the portfolio was fixed Cam and we're already back at 50 for the total portfolio.

And as you know Rps RP AI had almost no fixed cam at all so its quite amazing how quickly we've gotten back which shows you that our conversion ratio.

As in the 90% range.

So look the initiative is great I guess, it's not for everybody.

But for US it's been really.

Smart thing for us to do.

There is when you look at our when you look at our ratios you look at our NOI margin things like that I think that's where it shows up.

And obviously it has it.

It has escalators we don't.

Disclose those escalators, because that's a competitive thing, but the reality is.

They are probably higher than those base rent escalators. So.

Look for us in this business with the way rollover works.

And the time associated with that coming online. This is all adding but when you.

And all of the deals we've done this year right and as I said on my in my prepared remarks, we're almost a 100 basis points better than.

<unk> historical portfolio right. So that just shows you that this is a movement in the right direction.

I do think that it's a lot of it is how we run the business, but it's also a function of the strength of the platform in terms of open air retail and you've just got so many more retailers.

That are coming into the space it drives that friction.

Suffice to say I do think it is a big part of what we're doing.

Obviously.

Reimbursement is a smaller percentage of our revenue, but it's a material percentage.

And then maybe as a follow up you sold one of your potential.

Mixed use development site that Pan am I think.

Almost a zero or very low cap rate obviously.

Could you maybe update us on your thinking on some of these other.

Mixed use sites in particular, maybe give us an update on what's happening in Ontario, California with.

The former cinema box, there and then I think.

Extended the lease.

Cinema short term, but how is the entitlement process going and what are you thinking there and then maybe.

Has your thought process changed on what's going to happen at carillon going forward. The fact that there is very little new developments and.

Is there are there elements of that.

In particular in terms of retail that you that you would be very that you might be interested in.

Let me just give me a second and then I'll have Tom give you the details but in terms of.

Carillon.

Specifically.

We've been pretty clear that when we laid out our strategy on the developments the future developments.

<unk>.

We kind of looked at that quite differently than we did one Loudoun for example, and that Hasnt changed.

I think Caroline it's great and it's a great piece of real estate, but for us in terms of investing a lot of new capital, we're not looking to do that we're looking to minimize the investment.

There and maximize the investment in one Loudoun, so somatic Lee that theme hasn't changed but I'll, let Tom give you more details. Yes, then on Pan am and specifically that was that was the deal that we ended up selling the property to the city of Indianapolis.

There's no question that the highest and best use for that property or the convention center expansion and a large hotel. So that part that part was very straightforward and easy for US then on Ontario East of L. A we have a great 1900 19 acre parcel so.

In the process of working with the city and working on various concepts of Repurposing that property from a zoning standpoint, so that is moving along nicely. So on all of these including Carolina or just taken a very measured approach doing the right thing not foresee.

<unk> projects are developments the adult makes sense based upon the time periods over which we're on.

Okay.

Did you want me to go ahead and move onto the next question.

Yes, I'm sorry, yes sure.

Sure. Thanks, Louis one moment.

Okay.

Our next question comes from Alexander Goldfarb of Piper Sandler Your line is open.

Hey.

Good afternoon out there so two.

Two questions.

Keith.

Your bad debt assumptions I think you guys were pretty low in the first half I think it was 45 bps or something like that was pretty low back half. Your budgeting 125, you already know about bed Bath and party city AMC I'll bet known ones. So my question is really.

And youre not alone a number of the peers are being cautious on bad debt.

Are there truly concerning tenants out there or is this just.

Sort of view and other teams just trying to be conservative based on historic so like just trying to get a sense because it doesn't seem like from the headlines that there are big tenants that are pending out there, but maybe theres stuff. That's burbling below the surface that we don't know about so just looking for a bit more perspective.

No Alex I think the 125 basis point assumption is really rooted in history looking back you know typically we run between 75.

And 100 basis points of revenues is a typical year of bad debt and then laying on top of it that we're in a strange environment and Theres no question that the economy and the macro environment is full of uncertainties. So there isn't this a cult list I have in my pocket, Alex where I'm, saying why I better make sure I have enough bad debt to cover.

Pace X Y and Z falls out so theres nothing specific it's just us saying okay.

Let's assume it's going to be close to what we see historical plus or to add a little extra because the environment is strange. So that's really there's no magic to it.

Okay and then the second question is on the apartment front, just maybe a bit more color, especially as the environment steadily improves and maybe we can get back to some sort of transaction normalcy are you guys. The apartment initiative is this like converting parking fields is this like behind shopping centers is this adding second.

Our third floors or are you guys buying adjacent land to existing centers to put apartments, just a bit more perspective, and I think John you said, you would bring JV partners to sort of run these deals and help do everything so just a bit more color.

Sure, Yes, I mean, I think it was everything except the last <unk>.

Last bullet, we're not we're not actively out looking for land.

Jason to acquire generally speaking we already own.

Land, so yes, I mean, we've done a little bit of everything that you mentioned there Alex.

And it's been interesting because sometimes we have contributed a parking lot and taken a.

Say, a 15% equity interest vis vis the value of the land and then sometimes we've contributed capital it's a little bit of everything, but we have generally not look to do it solely ourselves. Obviously, we have been learning the business over the last several years pretty significantly.

That said I think at this point, we believe having some sort of operating partner, whether depending on what percentage they might own is really going to be dependent on the deal.

But the point, we're making is that this this potential stream of revenue is growing and we owned the kind of quality real estate, where people want to add multifamily right. So it's a nice complement to the primary business.

It generally has a higher growth profile.

But again, we're going to be very measured in how we go about it as we have been to date, but the reason I mentioned it is probably a lot of people don't really think of that that we've already amassed an equity interest or ownership interest in almost 2000 units and we have 5000 units that are entitled I mean, so we have a substantial.

Kind of ability to continue to grow that part of the business, but we will do it in a measured way by the way that's why our leverage is five times right we're measured thoughtful.

And then John but to that point the 1700 units those are.

Are those all operating right now where those are what you have under control that you could build.

Yes.

I am sorry, those are operating.

And then we have how many of those are under construction.

So we basically have four or five opportunities that are out there and one number that you may have gotten confused with us just at one Loudoun we have 1745 units through the zoning process that we would be able to develop so if you look at what we have under construction right.

Now the corner project.

285 multifamily units in the first occupancy is that it will begin just towards the end of this year, but there is there is an inventory of opportunities for us will be very measured we will make determination when the right times are but it is it's good to have that entitled land inside our feature.

<unk>.

Thank you.

One moment for our next question.

Okay.

Our next question comes from Anthony Powell with Barclays. Your line is open.

Hi, good afternoon.

You put a new slide in your deck.

With deliveries of the <unk> versus the total lease rate, which is very positive for you.

That said it suggests to me that at some point.

People will want to put more money into the space and actually construct new.

And we talked to and if so how far are we away from that is there a risk that in the next new easier money title.

And we have that people will start to talk more retail centers given the strong economics of results we see.

Anthony Hi, this is Keith I'll start and let John add on later, so I still think the environment is such that we're going to be in a continued low supply environment of low new supply environment.

If you look at what the construction costs are versus what you can buy an existing center for especially an existing center, where you may have some redevelopment plan, where you can maybe you can get it below replacement cost value. So I think structurally things are still looking good for us in terms of what new supply is going to look like.

On a go forward basis, and we're certainly not looking for raw parcels to do any greenfield construction ourselves. Obviously, we've got a lot of wood to chop on our existing projects for densification of multi use redevelopment some of our projects as well. So again US personally we are not it's not one of our sort of capital allocation levers, we plan on pulling and I think.

Everyone else is looking at the same way I think I think economically it's probably better to acquire at this point than it is to build new supply, but I'll, let John no piece.

He set a perfectly Anthony.

I just don't think that there is enough yield in these in a ground up deal and you also.

And you also have to remember a ground up deal generally would take you three years minimum to get to revenue I mean, probably five if you're really getting into finding the land and going through the entitlement process on.

Stuff, where you would want to own it. So I mean, it's one of many reasons, but I just at this point it just does not feel like.

There is a push towards new development and candidly you still were still working through an overbuild from the previous decade right. So as you work through that overbuild. It becomes this is why it's a better business today I mean, Theres 100 reasons why but this is one of the very very strong primary reasons is a better business.

I don't see that changing at anytime anytime and when you look at the deals that we do occasionally we generally already owned the land and our returns are well above what we would be otherwise getting and Thats why we do the deals and are landing in tradition is example of that.

Got it thanks and going onto other capital allocation. Some of your peers have either announced deals or rooms for announced deals. There is what I'm talking about seeing new deals come back to them. This morning, what are you seeing out there I mean, I know that you can't priority leasing, but any any potential when you start to ramp up.

The acquisition pipeline given given the environment.

No.

I think as the acquisition environment is still tepid that being said there is no question that there appears to be maybe even in the last six weeks.

More product coming to market that continues to come to market as individual centers I haven't they're ours.

A couple of larger portfolios that would have been no interest to us.

So we're actively involved in reviewing opportunities as I mentioned, we have.

One of the top two balance sheets in the entire sector. So if we want to do something we can.

But we're very very selective right now we have plenty to do.

And.

So I think I don't know about in terms of things coming back to market.

I guess if deals were pulled at some point in time, they are probably coming back around is this new packaging. It's the same deal right. So for US we're really more focused on.

If we're doing acquisitions were generally.

Pairing that trade with disposition, so right now thats kind of where we are which is why he said, we're looking at that impact to be neutral.

But again we're early.

We have a whole another half a year lock can happen.

Alright, thank you.

Thank you thanks Anthony.

Number four our next question.

Okay.

Our next question comes from <unk> <unk> with Bank of America. Your line is open.

Hi, everyone.

Okay.

<unk>, if I missed it.

Just wanted to see if you could give more color on that.

The decline in small shop occupancy.

To drop a bit more than.

Okay.

The dip we saw even last quarter.

Sure I mean, it's pretty simple.

It's really.

The majority of it I mean, there is a small part of it I think there was Jenny Craig.

But really the majority of it is actually us accelerating recapturing space, it's probably 75% of the drop where we have opportunities to move tenants out if they're in default.

And in this kind of environment, where we're getting the annual rent bumps that we're getting and the quality of tenants. We're getting I think we're moving very quickly.

To enact that pricing power. So there is really that's really it I mean, it's really more something that we want and we will continue to want to get our hands on.

I'll just add if you recall, our small shop lease rate was the highest in the sector at 92, 5%, So really where we're sitting now we're just viewing this as a tremendous opportunity as John said.

Before we've got leases and it takes a long time to effectuate change some we can recapture faster and get a better tenant with better rent in we're going to do it. So that's what's happening at 92 and a half was pre.

Pre COVID-19 and so there is no reason to believe we won't March back to that but.

Obviously, it takes time, but.

<unk>.

The more important thing here is the theme is if we can get space, we want space.

That's the theme.

Okay. Thanks, that's helpful.

And then I noticed.

You have a good outlay on page page 15 of the deck on.

Just your anchor inventory opportunity.

And I just.

I was curious on the 17%.

Brad that's expected on on what last.

And Jay just compared with the 26% spread.

That's been executed.

Yes.

The lower percentage, Sir just a function of what.

<unk> executed last quarter.

Is there anything to comment comment on there.

They are in terms of.

The expectations around rent growth.

So this is certainly not a not a.

A sign that we're decelerating a simple math, it's just basically taking our average in place rents.

In calculating the spread that way so as you can see we're trying to be conservative in saying well, we at least got our average rents in place we would have a 17% spread obviously with the column to the left you can see that we are doing much better than that so we anticipate being able to outperform that but for this this.

This presentation here, we're trying to be conservative and Youll see footnote four will give you an explanation of that number our leasing team ask the exact same question.

Lower.

We don't expect that to be the case.

Okay. Thanks, everyone.

One moment for our next question.

Yes.

Our next question comes from Michael Mueller with Jpmorgan. Your line is open.

Yes, Hi, just two quick ones first of all when you talked about the two 4% bumps on Q2 activity was that all in or was that just.

Excluding option renewals and then the second question is are you seeing any demand differences.

When it comes to the various product types like lifestyle versus community neighborhood or geography.

Yes first of all it excludes options, so thats new leases.

I'm sorry, Mike what was the second part.

Yes, just any demand differences, you're seeing across the product types basically.

Really I mean, that's one of the benefits of our portfolio.

And the different product types that we have there's been such cross pollination of retailers wanting to be in and these kind of three major food groups as we broke out in the investor deck community neighborhood mixed use lifestyle and power.

So and there has really been no real diff.

Differential there and from a geography perspective.

I mean, the geographies that we're in are very strong. So we're benefiting from that I mean, as you know 40% of our almost 40% of our revenue comes from Texas, and Florida, which I think is the highest in the space of those two states.

So that has afforded us a lot of opportunities because those are two very important growing markets for retailers, but by the same token I mean.

It's very broad based and I think we made the point in the remarks that.

When you get to this kind of a friction point when supply has dropped so.

So much over the last few years.

And demand has gone up a lot I mean, thats whats driving that increase.

Got it okay. Thank you.

Thank you thanks, Mike one moment for our next question.

Our next question comes from Lisa <unk> with Jefferies. Your line is open.

Hi, it's Linda in terms of the success in achieving fixed rent bumps. It sounds like those tenants are comfortable with our occupancy cost ratios.

How do you think about the opportunity to increase occupancy cost ratios, which tenant types have better capacity. When you look at your portfolio composition.

Sure Linda very good question I think Thats again.

Back to my theme on open Air I mean, one of the beauties of this platform is that the occupancy cost is low on a relative basis.

When you are comparing to other types of retail and especially when you are comparing to online only the acquisition cost of the customers is crazy.

I think the drive here is that when you look at the total portfolio. We have historically been high single digit occupancy cost kind of and you compare that to high teens. I mean, you can see that in other platforms. You can see that that is a real driver in their ability to continue to pay rent.

Rent bumps, but by the same token we have to make great selections about who the retailers are which is why we mentioned that it's never a foot race youre never youre always looking to thread that needle between the merchandising mix the retailers' ability to perform and the cost to occupy so right now that is a very good.

We're in a very good sweet spot as it relates to all those and we will.

You'll see some fluctuations simply through.

Geographics of different areas that have higher wage scales.

Maybe a little more difficult supply chain concept, but I think all in all we're doing a very good job watching that watching that ratio wanting our customer to be as healthy as possible. So it's a big focus around here.

Are there certain tenant types that have better capacity or does it relate back to kind of just wage gains in sales of a particular region.

Yes, no I don't.

I don't think there is a you can really pick a particular type of retailer it comes down to the individual store and how it performs and that can be very different across even the same brand right. So.

This is why real estate, so important I mean, you've heard US talk so many times about we focus on the dirt we focus on the quality of the real estate, what's on top of it is fungible.

So as long as we own very high quality real estate, then we should be able to we should be able to produce.

Or I should say, our customers should be able to.

<unk> results that allow us to continue to prosper and for us to prosper I mean, it's a partnership.

And we're pretty good at managing that partnership.

And then in terms of payback periods on anchors and small shops, given the demand for space and some commodity costs coming down do you expect payback periods to shorten.

I mean, yes, we're seeing them shorten in general.

And then they generally are less than three years when you look at the total portfolio.

But it really depends on the individual deal.

Linda as you know and that's why we focus on return on capital a lot more than spreads even though we're getting great spreads and we talk about it, especially when you look at our GAAP spreads right and that's where our rent growth comes into play.

But bottom line is our job is to.

Be very good fiduciaries with our <unk>.

<unk> capital and so we're much more focused on getting that.

Those high returns, which we've been doing.

Thanks.

Thank you one moment for our next question.

Our next question comes from Dori Kesten with Wells Fargo. Your line is open.

Oh, Thanks, good morning.

We expect capex spend to trend over the next 12 to 18 months.

Excluding the cost to get killed.

<unk> is back on line.

Excluding the cost against diverse space has done over the next 18 months its upwards of $200 million and so if you look at the total of bed Bath.

Inventory and what that might cost, it's probably somewhere in the neighborhood of between $4 $50 million additional they get those leased up as well and that Youll see that youll see thats been probably.

Later part of 'twenty, four and a 25%. So again, we've got significant capex spend we've got a significant signed not open pipeline. So it's going to be elevated over the next call. It two years, but we do see construction cost in general stabilizing.

<unk> will be able to see some more movement in that as general contractors construction managers begin to start pushing some of those savings down. So we feel like we're in a much more stable areas as we tackle some of these costs.

Okay. Thank you.

One moment for our next question.

Our next question comes from Wesley Golladay with Baird. Your line is open.

Hey, everyone, just curious which markets, which markets have the best pricing power and is there any region that is materially separating.

Hey, Wes we were talking about that a bit earlier right now its pretty well balanced and there is not one market that we see that as way outpacing another in terms of pricing power I mean, obviously some markets have higher embedded rent.

Than others, just because of the history of the market.

In the New York Region for example, but in terms of growth, it's very our ability to drive annual growth is widespread.

And look there's been a significant suburbanization over the last couple of years and we've we've been a big beneficiary of that and that appears to be pretty solid like not fading.

But that said also when you look at our gateway markets like Seattle or as I said, New York, Chicago et cetera. Those are those are growing as well. So I mean, there is a pretty strong bid out there for this.

Type of retail it's pretty.

Basic.

Okay, and then I think earlier in the prepared remarks, you mentioned the fees would step down for Hamilton crossing or fees.

You stopped the development at Hamilton crossing can you quantify that and then as we look to next year is there anything noticeable when it comes to that mark to market debt amortization for interest expense.

Yes, so the first part.

The deceleration of the fees, it's about $1 million back half of the year and the last one that was in the first half of the year. So again that project. The first phase of Hamilton crossing is winding down so those fees are going to be ending soon however, there is potential for.

Future phases, there so you may see.

Some more development fees turn on maybe before the end of the year and into 24, so hopefully that will be something that we can repeat going into 'twenty four.

And then in terms of what was the second part of your question was that the the debt amortization.

Tomorrow market gain on the Mark to market gains will probably see a decline on I'll call. It two pennies around $4 million into into 2024 as those maturities hit.

Okay. Thanks for that.

One moment for our next question.

Okay.

Our next question comes from Paulina Rojas with Green Street. Your line is open.

Hello, everyone.

So we have not heard about mall tenants looking to migrate to the open air space some of them and you also highlighted.

<unk>.

Two questions.

Mainly taking place February lifestyle centers, or you're also food across our property types.

The second level, how do you think this trend accelerated.

Progressing.

Okay.

Hey, Paul Anthony So macro.

Tom should comment obviously, but macro.

If this trend.

I don't know if trends the right word I mean, it's really just the fact that there is less retail space.

Open Air retail segment is very cost effective.

So you are finding.

Retailers really not delineate as much as they once did and these different product types. So I do think semantically. It's important to understand I think it's more than a trend I just think it's the business the business has changed.

And these retailers have realized again and Tom can give detailed our retailers have realized better profitability in the open air sector is significant and that's why they want to grow the platform quickly, but Tom can give you a little more detail.

Paul.

I think it really comes down to one major factor in that is convenience and I think as people become more and more busy in their lives with the various things that pull on them. The convenience is critical that you can pull up to an open air shopping centers get out of your car and immediately ingress into a store.

And then cross shop as well.

And then.

In addition to that.

You are able to get shops, maybe two or three times a week or if you are in and close situations that may be just one of them a week and then with our expense structure. These.

These numbers start to overwhelm some of these retailers, saying we have to diversify this doesn't mean that they are leaving their primary.

Locations and shopping center. It just means they need to touch a different shopper and a more convenient atmosphere. So we are seeing we are seeing great strength and like John said. This is just an evolution that is very consistent and we're even seeing.

Some groups like maybe a sephora thats, even leaning out maybe beyond the higher open air shopping center into more of a power or more productive center like that so I think we will see these technicals kantar.

<unk> continued to expand over the next couple of years, which has obviously been a big help to the open air industry.

Thank you that's helpful and another short one.

Kevin has been with possible.

Corporate C&I flows.

On the mobile just touching.

<unk> medicine.

Can you touch on what retailer categories driving this growth.

The full year contribution to align with what was the date.

We are seeing that overage rent over a broad array array of tenants. So it's not really one particular tenant type tenants that are paying as a percentage of rent that never paid as a percentage of rent at all we have a furniture retailer.

That is paying us just amount of overdraft, we never thought was possible. So it's really been extremely broad its restaurants, its the discounters grocery stores.

You name it we're seeing it everywhere.

We're experiencing the higher the highest levels, we're even seeing in theaters for experienced the highest level of overdraft, we've ever experienced in the company. So.

We expect that trend to continue.

And I'm not showing any further questions at this time I would like to turn the call back over to John Kite for any closing remarks.

So I just wanted to say again, thank you all for taking the time to join US today and thank you for having an interest in <unk> have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Good day, and thank you for standing by and welcome to the Q2 2023 Kite Realty Group Trust earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the special need to press Star one on your telephone you will then hear an automated message advising your hand, just race to withdraw your question. Please press star.

Wouldn't want again.

Please be advised today's conference is being recorded I would now like to hand, the conference will be your speaker today Bryan Mccarthy. Please go ahead.

Actual results may differ materially from these statements.

non-GAAP performance measures to our GAAP financial results on.

On the call with me today from Kite Realty group.

<unk> and Chief Executive Officer, John Kite, President and Chief operating Officer, Tom Mcgowan.

Executive Vice President and Chief Financial Officer, Heath, Fear, Senior Vice President and Chief Accounting Officer.

Fuel and senior Vice President capital markets, and Investor Relations, Tyler Henshaw I will now turn the call over to John .

Alright, good morning, everybody. Thanks, a lot Brian .

Turning to the second quarter <unk> delivered outstanding operational results.

Continuing to fortify our best in class balance sheet.

The demand for our high quality space remains strong and.

And we are in a prime position to continue to drive pricing improve our overall long term growth profile enhanced tenancy and further grow our revenue and cash flow.

Turning to our results, we generated <unk> per share of <unk> 51.

Beating consensus estimates by <unk> <unk> per share.

Our same property NOI growth for the quarter was five 7% as compared to the same period in 2022.

Our outperformance in the first half of the year is allowing us to increase our NAREIT <unk> guidance by <unk> <unk> at the midpoint.

We're also increasing our same property NOI growth assumption by 75 basis points moving from 275% to three 5% Keith will provide more details around our quarterly results and updated guidance.

We signed 190 leases representing over one 3 million square feet, producing a sector, leading 14, 8% blended cash spread on comparable new and renewal leases.

Excluding the impact of option renewals, our blended cash spreads were 24%.

More importantly, <unk> earned a 32% return on capital for new leases.

As Ive emphasized previously leasing existing space provides the best risk adjusted return for our invested capital.

While our ability to drive pricing on an initial rents remains strong.

We're taking this opportunity to redefine our long term growth trajectory.

Recognizing the favorable supply and demand dynamic in open air retail at the outset of the year, we focused our leasing efforts on implementing higher fixed rent bumps and CPI adjustments.

I am pleased to report that through the first half of 2023.

We have been extremely successful with this initiative.

80% of our new and non option renewal leases signed have fixed rent bumps that are greater than or equal to 3%.

And 40% of those leases have CPI adjustments.

The average annual fixed rate fixed rent increases for new and non option renewals in the first half of 'twenty three was two 4%.

Including both our small shop and anchor tenants, which is 90 basis points higher than our portfolio average.

We are laying a solid foundation to improve our long term embedded growth profile.

Based on the current tenant demand I can't think of a better time for <unk> to upgrade the merchandising mix at our centers.

Dave and a different leasing environment and the liquidation of bed Bath could've been a real jolt to the sector.

Ted It is providing to be one of the best opportunities we've been afforded.

I was adamant about maximizing this opportunity by prioritizing the best solution over the fastest solution.

That said I'm pleased to report that we're making great progress back filling those boxes at higher rents with better tenants.

The pool of tenants to backfill, the attractively size and well located boxes as deep and diverse.

Thus far we're negotiating with 15 different brands across the retail spectrum.

Including grocery sporting goods, Big Big box wine and spirits home furnishings and off price apparel.

Keith will provide more detail on the current status and we look forward to providing updates as we progress.

<unk>.

Our success in enhancing the merchandising mix is not limited to the bed Bath basis.

Year to date, we have opened two grocery stores in our portfolio and have an additional four grocery stores in the signed not open pipeline.

In addition to adding grocers to the portfolio. We will also have several opportunities to add multifamily units to our mixed use and lifestyle portfolio.

We currently have an ownership interest in nearly 1700 apartment units and have entitlements for an additional 5000 units.

We look forward to further densify our properties at healthy risk adjusted returns and partnering with best in class operators when appropriate.

The <unk> team continues to capitalize upon the demand for open air retail and the resiliency of our cash flows.

Our efforts to enhance our merchandising mix drive pricing power and increase our long term embedded growth.

<unk> profile.

Undoubtedly increase the value of our open air centers.

We have often talked about the optionality afforded to owners of high quality real estate that same optionality is exponentially increased when supported by unparalleled operational acumen.

And our best in class balance sheet with substantial liquidity.

We're extremely well positioned to seize the opportunities that lie ahead.

I want to take a minute to really thank our team for their continued dedication outperformance and commitment I will now turn over the call to east.

Good afternoon I.

I wanted to start by thanking our operational team for once again, allowing me to share the good news quarter after quarter, it's been a privilege to report on your considerable accomplishments.

<unk> exceeded expectations by generating NAREIT <unk> per share a 51 during the second quarter and $1 <unk> year to date. The quarterly outperformance was primarily driven by higher than anticipated same property NOI, which grew by five 7% during the second quarter and six 1% year to date.

During the second quarter increased occupancy and rent escalators were the primary driver of our same property NOI growth with a 360 basis point increase in minimum rent and net recoveries.

140 basis point increase due to lower bad debt.

And a 70 basis point increase in overage rent and other revenue is.

As John alluded to earlier, we are raising our NAREIT <unk> per share guidance range to $1 96 to $2, representing a three <unk> increase at the midpoint two pennies are attributable to a corresponding increase in our same property NOI growth assumption as a result of lower bad debt payment of post petition rent from bed Bath <unk> beyond and higher.

Overdrafts.

Penny is related to an unbundled a termination fee or.

Our updated guidance incorporates the following assumptions regarding the back half of 2023, we are assuming no additional rent from bed Bath <unk> beyond specifically, we expect the gross rent from bed bath locations to be <unk> less than will be collected during the first half of the year.

<unk> crossing project nears completion.

We are not modeling any additional termination fees and while we sold two assets in the quarter, we anticipate the impact of transactional activity will be essentially neutral to earnings as the blended cap rate on the transactions as well below the interest income offset.

We have only $95 million of debt maturities remaining in 2023, which will satisfy with cash on hand and proceeds from our line.

As for the $270 million coming due in 2024, we continue to remain opportunistic as it relates to the unsecured debt markets.

Good news is that our indicative spreads have materially tightened recently, which further verifies our patient approach.

Before turning the call over to Q&A I want to take a moment to further elaborate on the progress, we're making with the backfill and bed Bath <unk> beyond spaces.

We ended the first quarter with 22 units, representing one 4% of ABR and 522000 square feet of GLA.

Thus far three units were acquired in the bankruptcy auction six units are either leased or under a signed LOI and then 11 units are in LOI negotiation as John mentioned, enhancing our merchandising mix with 15 different brands generating strong spreads and returns on capital and further burst bolster.

The durability of our cash flows and a tremendous opportunity for <unk>. Thank you for joining the call today. Operator. This concludes our prepared remarks. Please open the line for questions. Thank.

Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or you are seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.

Our first question comes from Todd Thomas with Keybanc capital markets. Your line is open.

Okay.

Yes, hi.

Afternoon, John first question.

You opened up.

By commenting that you are working to drive.

The increase in the long term growth of the portfolio and talked about some of the success that you've realized this year I'm just curious what you think the impact of some of those initiatives.

Are having on the stabilized growth of the portfolio today, maybe at full occupancy.

If you think about it that way and how that compares to maybe five or 10 years ago. And then is there is there a target that you are working to achieve in terms of that that long term growth rate for the portfolio either in terms of the escalators or otherwise and when do you think you might achieve that.

Well I think I mean, as you know Todd is it.

Next time for that to work through the portfolio.

But I mean, there is no question that the embedded rent growth that we are that we're achieving in 2023 as I mentioned very specifically is significantly above where the portfolio average was almost 100 basis points.

And I hope you caught when I was talking about it in terms of what we've achieved this year, we were including both the anchor and small shop space, but the reality of that is that.

The ability to really drive that growth.

And have it have it come to fruition more quickly is going to be in the shop space because of the quicker turns and the better ability to get those three and 4% annual bumps and then <unk>.

Candidly the CPI adjustment as an insurance policy.

We've also added to that and that used to be fairly and when I say used to be a long time ago that was a very typical part of the business.

And over the last say.

Got 10 years, there wasn't a lot of talk about that in.

Information I mean, it's going to help because there is no question and more importantly.

It's a function of the interest in open air retail alright. So you can break down a lot of different things, but when you look at our non option renewal spreads.

How is how is the health of the business. The health of the business is very strong for us in particular, it's very strong.

Okay are you having success driving annual escalators with tenants.

With anchors maybe in certain categories and with certain credits that have historically pushed back on escalators or are you seeing those changes are realized there.

I'll comment and I'll have Tom jump in I mean from my perspective.

Absolutely, we're having success, having those conversations that being said I mean, the anchor side of the business is more difficult to.

To get that done.

So historically would we be happy with a 10% increase after five years at an anchor deal that would be pretty typical now we're trying to push that a little further.

So it's not as.

Readily available because of the way the turnover happens, we just have less turnover there, but Tom you want to comment too I think we have to take a look at this in steps and we're in the we're in the early stages of trying to educate and work with larger box tenants.

Instead of note bumps in five maybe we take a look at our shorter term of three and then we start the bonds.

So he is in or using different tools to get to the same place, but it will take us longer but we're very much focused on not only the small shops, but the anchors as well and as long as we have this focus as long as the team is ready to go we expect to make nice advances.

Okay.

And then Heath.

A question for you the portfolios lease rate.

Around the expected trends for the portfolio is leased and economic occupancy rates moving into the second half of the year.

Sure so titles into the lease rate is basically a point of time at the end of the quarter. So youre looking at that day you are saying. This is how much is least whereas your economic occupancy represents your average occupancy during the quarter. So the full impact of the bed Bath is running through your leased rate, but it is not running through your through your economic occupancy. That's why you also saw.

Compression on your spread between our leased and occupancy so as we move into the back half of the year Youll see the occupancy start to track the least in terms of its fallout from the bed Bath. So that explains why that delta happened and that explains why we're flat in the occupancy.

But we are having a more decline in the leased rate in terms of the trajectory Todd as of the.

As of the first half we only had eight of that bed bath were out of our occupancy and lease numbers.

And an additional 14 to that calling into the third quarter, so you're going to see or are leased and occupancy rates sort of trough into the third quarter. So putting some numbers around it it's about 120 basis points just bed Bath alone. So again, you'll see that drop and then over the course of time as we start to sign up those diverse and beyond leases youre going to see number one our <unk> Gro.

And you also see that spread between leased and occupied grow as well so thats kind of how to think about the balance of the year.

Okay. That's helpful. All right. Thank you.

One moment for our next question.

Our next question comes from Craig Mailman with Citi. Your line is open.

Hey, guys, Keith maybe just to follow up on Todd's last question on occupancy as we think about kind of isolating the bed Bath, which you did 120 basis points again factoring in the commencement of the <unk> pipeline.

I mean, how much of that as well.

Offset kind of this drag from bed bath kind of hitting the numbers in the second half.

Yes, so Craig we don't we don't guide to occupancy at the year end, so that's kind of where youre going with this so I would tell you that I don't think the.

Yes, the lease rates not going to move because obviously those are already signed in terms of the economic occupancy I don't think it's going to catch up to 420 from a bed Bath. So I think we'll be ending the year, probably at a spot that's lower than where we started the year.

But that's really as much direction as I can give you because again the 120 basis points. Obviously is a lot of movement to be happening in a single quarter.

Okay. That's helpful.

And then John I know you said over over the past few quarters here, it's more about maximizing rate rather than <unk>.

Speed to lease up on on the bed Bath, but sounds like you guys had really good traction.

The timeframe is to get that revenue back up and running and then maybe also just run through how much of those are single tenant backfill versus maybe splitting the boxes.

Yes, I mean, I don't think that the overall trajectory has changed much Craig in the sense that.

What we've experienced over the last several years I mean, we've done what 60 something boxes over the last few years generally speaking when you sign a lease it's going to take 12 to 18 months for rent commencement and it's going to depend on how much work you're doing in that space.

So I know some people say it happens faster than that but those are rare.

It has to be in as his deal and not a lot going on in terms of work. So I think we're still on that trajectory of as the leases get signed it's approximately in that 12 month period.

And then I would say in.

In terms of splits right now the majority of the conversations as they have been for the last two.

Say four quarters, our tenants wanting to take the entire space or us requiring them to take the entire space. More importantly, now couple of instances, where we may want to subdivide and for merchandising mix and Thats kind of what I meant by this is not a speed game.

And so but the splits are pretty rare I mean up to 63 deals we've done in the last.

Whatever a couple of years.

We split one which is kind of unbelievable and it goes back to the theme.

Open Air is strong.

Okay.

And then you guys got leverage down to five times you mean.

From a long term perspective.

Kind of what's the goal here how much capital do you kind of keep dry here for potential opportunities.

Kind of thoughts on balance sheet management.

Yes.

To talk about this too good but from my personal perspective, we're at five times.

Ebb and flow quarter to quarter, a little bit but not materially.

So we're at the low end of our range that we've set out as a goal which is pretty fabulous.

We've de Levered on basically a turn and a half since the merger.

Another beautiful benefit of the Fabulous deal that was done.

And so were we wanted to make the point that our balance sheet is.

No issues with our balance sheet, So we love where the balance sheet is it's a very strong position.

And we want to continue to be in the low to mid fives like we've been saying.

And again that affords us lots of Optionality.

Keith do you want to add.

Okay, great answers.

Did you want to add anything or not.

Nothing to add.

I took the words out of his mouth turned on my math correct.

Our balance sheet is in great shape lots of liquidity.

One quick one Heath is there anything legacy RPI related on swaps amortization thats running through the numbers and if there is kind of how long does that.

What's the tail on that until that burns off.

I'd have to look at our maturity schedule and I'll figure out, which one of the RPI debt instruments are swapped into how long they run through so I think nothing material running through it I will tell you. The one thing thats continuing to run through the P&L that the swap as you recall in 2021, and we took out that forward that was $150 million and thats, resulting in about a $3 million benefit.

Every year to our interest expense one thing about it is a little lumpy. So you may have noticed there is a sequential sort of.

The increase in interest expense from the first quarter, the second quarter, because when we realized that $3 million, we realized half of it in the first quarter and half of it in the third quarter. So it gets a little lumpy, but nothing I'll call a dose with those swaps.

That youre thinking about Craig and again, we can offline to take a look at one of those things exactly mature if you want me to quantify that for you further.

No. That's helpful is there anything to call out sequentially on interest expense from Q2 to three Q.

Again other than in <unk> youre going to see the benefit of that one $5 million again, and then obviously there is a slight increase in <unk>.

Sulfur based on recent moves by the fed so to the extent that we have floating rate debt, you will see a small uptick but nothing material quarter over quarter.

Great. Thanks, everyone.

One moment for our next question.

Our next question comes from Floris Van <unk> with Compass point Your line is open.

Hey, guys. Thanks for taking my question.

I guess, let me start with.

As you John I mean, you sort of mentioned this in some of your comments as well.

Raising the long term growth rate of the portfolio part of that obviously is through higher fixed rent bumps picky on the shop space and also how you change the the anchor bumps going forward.

One of the other things that.

Oftentimes overlooks is.

Your your move to fixed Cam was totally one of the earliest in the shopping center space and.

We've seen this play out 20 years ago 25 years ago in the mall space, where Simon GGP, where the sort of the impact I think GDP was the first one to do it but Simon followed shortly thereafter in terms of going to fixed cam.

Simon has stopped disclosing because the profit margins are so so large on that.

Part of the business, maybe could you give us a little bit of an update.

How fixed Cam is going what percentage of your portfolio is that and what kind of bumps are you getting in terms of escalators and how you see that enhancing your growth going forward.

Sure.

And I guess he brought the <unk>.

Fixed Cam initiative from GGP.

Thankful, but the reality is we're doing very well there.

Got it back.

Much quicker than we thought when we when we did the merger we were around 50% of the portfolio was fixed Cam and we're already back at 50 for the total portfolio.

And as you know Rps RP AI had almost.

No fixed cam at all so its quite amazing how quickly we've gotten back which shows you that our conversion ratio.

As in the 90% range.

So look the initiative is great I guess, it's not for everybody.

But for US it's been really.

Smart thing for us to do.

There is when you look at our when you look at our ratios you look at our NOI margin things like that I think that's where it shows up.

And obviously it has.

It has escalators we don't.

Disclose those escalators, because that's a competitive thing, but the reality is.

They are probably higher than those base rent escalators. So.

Look for us in this business with the way rollover works.

And the time associated with that coming online. This is all adding but when you.

And all the deals we've done this year right and as I said on my in my prepared remarks, we're almost 100 basis points better than.

<unk> historical portfolio right. So that just shows you that this is a movement in the right direction.

Do think that it's.

A lot of it is how we run the business, but it's also a function of the strength of.

The platform in terms of open air retail and you've just got so many more retailers.

That are coming into the space it drives that friction.

So suffice to say I do think it is a big part of what we're doing.

Obviously.

Reimbursement is a smaller percentage of our revenue, but it's a material percentage.

And then maybe as a follow up.

Sold one of your potential.

Mixed use development site that Pan am I think.

Mr Zero or very low cap rate obviously.

Could you maybe update us on your thinking on some of these other.

Mixed use sites in particular, maybe give us an update on what's happening in Ontario, California with the former cinema box there and then I think.

Extended the cinema short term, but how is the entitlement process going and what are you thinking there and then maybe.

Has your thought process changed on what's going to happen at carillon going forward. The fact that there is very little new development and.

Is there are there elements of that that.

Particularly in terms of retail that you that you would be very that you might be interested in.

Let me just give you a second and then I'll have Tom give you the details but in terms of.

Caroline <unk>.

Specifically.

We've been pretty clear that when we laid out our strategy on the developments the future developments.

<unk>.

We kind of looked at that quite differently than we did one Loudoun for example, and that Hasnt changed.

I think Caroline it's great and it's a great piece of real estate, but for us in terms of investing a lot of new capital, we're not looking to do that we're looking to minimize the investment.

There and maximize the investment in one Loudoun, so somatic Lee that theme Hasnt changed but I'll, let Tom give you more details. Yes, then on Pan am and specifically that was that was the deal that we ended up selling the property to the city of Indianapolis. There was no question that the highest and best use for that prop.

<unk>, who is the convention center expansion and a large hotel so that part that part was always very straightforward and easy for US then on Ontario East L. A we have a great 1919 acre parcel. So we are in the process of working with the city and <unk>.

I'm working on various concepts of Repurposing that property from a zoning standpoint, so that is moving along nicely. So on on all of these including Carolina or just taken a very measured approach doing the right thing not foreseeing projects are developments the adult male.

Sense based upon the time periods over which we're in.

Okay.

Did you want me to go ahead and move onto the next question.

Yes, sorry, yes.

Sure. Thanks Louis.

One moment.

Okay.

Yes.

Our next question comes from Alexander Goldfarb with Piper Sandler Your line is open.

Hey.

Good afternoon out there so two questions.

Heath.

And youre not alone a number of the peers are being cautious on bad debt.

They are truly concerning tenants out there or is this just.

Sort of view and other teams just trying to be conservative based on historic like just trying to get a sense because it doesn't seem like from the headlines that there are big tenants that are pending out there, but maybe their stuff. That's burbling below the surface that we don't know about so just looking for a bit more perspective.

Alex I think the 125 basis point assumption is really rooted in history looking back you know typically we run between 75.

And a 100 basis points of revenues is a typical year of bad debt and then laying on top of it that we're in a strange environment and Theres no question that the economy and the macro environment is full of uncertainties. So there isn't this a cult list I have in my pocket, Alex where I'm, saying why I better make sure I have enough bad debt to cover.

Pace X Y and Z falls out so there is nothing specific it's just us saying okay.

Let's assume it's going to be close to what we see historical plus or to add a little extra because the environment is strange. So that's really it. So there is no magic to it.

Sure, Yes, I mean, I think it was everything except the last <unk>.

The last bullet, we're not we're not actively out looking for land.

Adjacent to acquire generally speaking we already own the land. So yes, I mean, we've done a little bit of everything that you mentioned there Alex and.

And it's been interesting because sometimes we have contributed a parking lot and taken out.

We believe having some sort of operating partner, whether depending on what percentage they might own is really going to be dependent on the deal.

It generally has a higher growth profile.

Kind of ability to continue to grow that part of the business, but we'll do it in a measured way by the way that's why our leverage is five times right we're measured thoughtful.

And then John but to that point the 1700 units those are.

Are those all operating right now where those are what you have under control that you could build yes.

Yes.

No no I'm sorry, those are operating.

And then we have how many of those are under construction. So we basically have four or five opportunities that are out there and one number that you may have gotten confused with is just that one loudoun. We have 1745 units through the zoning process that we would be able to do.

Develop so if you look at what we have under construction right now.

The corner project.

285 multifamily units and the first occupancy is that it will begin just towards the end of this year, but there is there is an inventory of opportunities for us will be very measured we will make determination when the right times are but it is it's good to have that entitled land inside our future.

<unk>.

Thank you.

One moment for our next question.

Okay.

Our next question comes from Anthony Powell with Barclays. Your line is open.

Hi, good afternoon.

You put a new slide in your deck.

Were delivering into the plaque Roe versus the total lease rate, which is very positive for you.

That said it suggests to me that at some point.

People will want to put more money into the space and to actually construct.

And we talked to and if so how far are we away from that is there risk that in the next new easier money titled climate.

And we have that people will start to build more retail centers given the strong economics of results we see.

Anthony Hi, this is Keith I'll start and let John add.

Add on later, so I still think the environment is such that we're going to be in a continued low supply environment of low new supply environment.

Really if you look at what the construction costs are versus what you can buy an existing center for especially an existing center, where you may have some redevelopment plan, where you can maybe you can get it below replacement cost value. So I think structurally things are still looking good for us in terms of what new supply is going to look like.

Go forward basis, and we're certainly not looking for raw parcels to do any greenfield construction ourselves. Obviously, we've got a lot of wood to chop on our existing projects for densification of multi use redevelopment some of our projects as well. So again US personally we are not it's not one of our sort of capital allocation levers we plan on pulling.

Everyone else is looking at the same way I think I think economically it's probably better to acquire at this point than it is to build new supply, but I'll, let John no.

<unk> set a perfectly Anthony.

I just don't think that there is enough yield in these in a ground up deal and you also.

Also have to remember a ground up deal generally would take you three years.

Minimum to get to revenue I mean, probably five if youre really getting into finding the land and going through the entitlement process on.

Stuff, where you would want to own it. So I mean, it's one of many reasons, but at.

At this point it just does not feel like.

There's 100 reasons why but this is one of the very very strong primary reasons is a better business.

I don't see that changing at anytime anytime and when you look at the deals that we do occasionally we generally already own the land and our returns are well above what we would be otherwise getting thats why we did the deals in our landing and tradition is an example of that.

Got it thanks and going onto other capital allocation. Some of your peers have either announced deals or Lindsay announced deals there as well talking about seeing new deals come back to them. This morning, what are you seeing out there I mean, I know that in your priorities and leasing, but any any potential when you start to ramp up the.

The acquisition pipeline given given the environment.

No.

Is the acquisition environment is still tepid that being said there is no question that there appears to be maybe even in the last six weeks.

More product coming to market. It continues to come to market as individual centers I Havent. There are there's a couple of larger portfolios that would have been no interest to us.

So we're actively involved in reviewing opportunities as I mentioned, we have.

One of the top two balance sheets in the entire sector. So if we want to do something we can.

But we're very very selective right now we have plenty to do.

And so I think I don't know about in terms of things coming back to market.

I guess if deals were pulled at some point in time, they are probably coming back around its just new packaging. It's the same deal right. So for US we're really more focused on.

If we're doing acquisitions were generally.

Pairing that trade with disposition, so right now thats kind of where we are which is why he said, we're looking at that impact to be neutral.

But again we're early.

We have a whole another half a year lock can happen.

Okay. Thank you.

Thank you. Thanks, Anthony one number for next question.

Yes.

Our next question comes from Lindsay Drucker with Bank of America. Your line is open.

Hi, everyone.

At.

I apologize if I missed it.

I just wondered if you could give more color on that.

The decline in small shop occupancy.

It tends to drop a bit more than that.

The dip we saw even last quarter.

Sure I mean, it's pretty simple.

It's really.

The majority of it I mean, there is a small part of it I think there was Jenny Craig.

But really the majority of it is actually us accelerating recapturing space, probably 75% of the drop where we had opportunities to move tenants out if they're in default.

And in this kind of environment, where we're getting the annual rent bumps that we're getting and the quality of tenants. We're getting I think we're moving very quickly.

To enact that pricing power. So there is really that's really it I mean, it's really more something that we want and we will continue to want to get our hands on.

I'll just add if you recall, our small shop lease rate was the highest in the sector at 92, 5%, So really where we're sitting now what is viewing this as a tremendous opportunity as John said.

Before we've got leases and it takes a long time to effectuate change. So we can recapture faster and get a better tenant with better rent in we're going to do it. So that's what's happening at 92 and a half with pre Covid and so there's no reason to believe we won't March back to that but it obviously takes time, but I think the more.

Important thing here is the theme is if we can get space, we want space.

That's the theme.

Okay. Thanks, that's helpful.

And then I noticed you havent good outlay on page page 15 of the deck on.

Your anchor inventory opportunity.

And I just.

I was curious on the 17%.

Brian that's expected on on what last.

And Jay just compared with the 26% spread.

And that's been executed it is.

The lower percentage, Sir just a function of what Ben.

Executed.

Sure.

Is there anything to comment comment on there.

In terms of.

The expectations around rent growth.

So this is certainly not a not a.

A sign that we're decelerating a simple math, it's just basically taking our average in place rents.

In calculating the spread that way because you can see we're trying to be conservative in saying well if we at least got our average rents in place we would have a 17% spread obviously with the column to the left you can see that we are doing much better than that so we anticipate being able to outperform that but for this this.

This presentation here, we're trying to be conservative and Youll see footnote four will give you an explanation of that number our leasing team ask the exact same question.

Laura.

We don't expect that to be the case.

Okay. Thanks, everyone.

One moment for our next question.

Yes.

Our next.

Comes from Michael Mueller with Jpmorgan. Your line is open.

Yes, Hi, just two quick ones first of all when you talked about the two 4% bumps on Q2 activity was that all in or was that just <unk>.

Excluding option renewals and then the second question is are you seeing any demand differences.

When it comes to the various product types like lifestyle versus community neighborhood or geography.

Yes first of all it excludes options, so thats new leases.

I'm sorry, Mike what was the second part.

Yes, just any demand differences, you're seeing across the product types basically.

Really I mean, that's one of the benefits of our portfolio.

Differential there and from a geography perspective.

I mean, the the geographies that we're in are very strong. So we're benefiting from that I mean, as you know 40% of our almost 40% of our revenue comes from Texas, and Florida, which I think is the highest in the space of those two states. So that has afforded us a lot of opportunities because those are two.

Very important growing markets for retailers, but by the same token I mean.

It's very broad based and I think we made the point in the remarks that.

When you get to this kind of a friction point when supply has dropped so.

So much over the last few years and demand has gone up a lot I mean, that's what's driving that increase.

Got it okay. Thank you.

Thank you. Thanks, Mark just one moment for our next question.

Our next question comes from Lisa Tsai with Jefferies. Your line is open.

Hi, it's Linda in terms of the success in achieving fixed rent bumps. It sounds like those tenants are comfortable with our occupancy cost ratios.

How do you think about the opportunity to increase occupancy cost ratios in which tenant types have better capacity. When you look at your portfolio composition.

Sure Linda very good question I think Thats again.

Back to my theme on open Air I mean, one of the beauties of this platform is that the occupancy cost is low on a relative basis.

When you are comparing to other types of retail and especially when you are comparing to online only the acquisition cost of the customers is crazy.

Kind of we're in a very good sweet spot as it relates to all those and we will see some fluctuations simply through geographics of different areas that have higher wage scales.

Maybe a little more difficult supply chain concept, but I think all in all we're doing a very good job watching that watching that ratio wanting our customer to be as healthy as possible.

That's a big focus around here.

Are there certain tenant types that have better capacity or does it relate back to kind of just wage gains.

Sales of a particular region.

Yes, no I don't.

This is why real estate, so important I mean, you've heard US talk so many times about we focus on the dirt we focus on the quality of the real estate, what's on top of it is fungible.

So as long as we own very high quality real estate, then we should be able to we should be able to produce.

Or I should say our customers should be able to produce results that allow us to continue to prosper and for us to prosper I mean, it's a partnership.

And we're pretty good at managing that partnership.

And then in terms of payback periods on anchors and small shops, given the demand for space and some commodity costs coming down do you expect payback period to shorten.

I mean, yes, we're seeing them shorten in general.

And then they generally are less than three years when you look at the total portfolio.

It really depends on the individual deal Linda as you know and that's why we focus on return on capital a lot more than spreads even though we're getting great spreads and we talk about it, especially when you look at our GAAP spreads right and Thats, where our rent growth comes into play.

But bottom line is our job is to.

<unk> very good fiduciaries with our investor.

Investor capital and so we're much more focused on getting that.

Those high returns, which we've been doing.

Thanks.

Thank you one moment for our next question.

Our next question comes from Dori Kesten with Wells Fargo. Your line is open.

Oh, Thanks, good morning.

Would you expect.

Capex spend to trend over the next 12 to 18 months.

Including and excluding the cost to get killed.

Spaces back on line.

Excluding the costs against diverse space has done over the next 18 months its upwards of $200 million and so if you look at the total of bed Bath inventory and what that might cost, it's probably somewhere in the neighborhood of between $40 million to $50 million additional I get those leased up as well and.

Youll see that Youll see thats been probably lay.

Later part of 'twenty, four and a 25%. So we've got significant capex spend we've got a significant signed not open pipeline. So.

Going to be elevated over the next call. It two years, but we do see construction cost in general stabilizing.

We will be able to see some more movement in that as general contractors construction managers begin to start pushing some of those savings down. So we feel like we're in a much more stable areas as we tackle some of these costs.

Okay. Thank you.

One moment for our next question.

Our next question comes from Wesley Golladay with Baird. Your line is open.

Hey, everyone, just curious, which market, which markets have the best pricing power and is there any region that is materially separating.

Than others, just because of the history of the market.

In the New York Region for example, but in terms of growth, it's very our ability to drive annual growth is widespread.

And look there has been a significant suburbanization over the last couple of years and we've we've been a big beneficiary of that and that appears to be pretty solid like not fading.

But that said also when you look at our gateway markets like Seattle or the new as I said, New York, Chicago et cetera. Those are those are growing as well. So I mean, there is a pretty strong bid out there for this.

Type of retail it's pretty basic.

Okay, and then I think earlier in the prepared remarks, you mentioned the fees would step down for Hamilton crossing or fees.

Stop the development at Hamilton crossing can you quantify that and then as we look to next year is there anything noticeable when it comes to that mark to market debt amortization for interest expense.

Yes, so the first part.

The deceleration of the fees, it's about $1 million back half of the year and the last one that was in the first half of the year. So again that project. The first phase of Hamilton crossing is winding down. So those fees are going to be ending soon however, there is a potential for.

Future phases, there so you may see that.

Some more development fees turn on maybe before the end of the year and into 24, so hopefully that will be something that we can repeat going into 'twenty four.

And then in terms of the most of the second part of your question was that the the debt amortization.

So mark to market gain.

And the Mark to market gains will probably see a decline on I'll call. It two pennies around $4 million into into 2024 as those maturities hit.

Okay. Thanks for that.

One moment for our next question.

Okay.

Our next question comes from Paul in a Rowhouse with Green Street. Your line is open.

Hello, everyone.

So we have not heard about mall tenants looking to migrate to the open air space from them and you also highlighted in your presentation.

Two questions.

Mainly taking call February lifestyle centers, or you're also pooled across our property types.

The second level.

This trend accelerated.

Progressing.

Yes.

Hey, Paul so macro.

<unk> should comment obviously, but macro.

Yes.

If this trend.

I don't know if trends the right word I mean, it's really just the fact that theres less retail space.

Open Air retail segment is very cost effective.

So you are finding.

Retailers really not delineate as much as they once did and these different product type. So I do think semantically it's important to understand.

I think it's more than a trend I just think it's the business the business has changed.

Paulina.

And then cross shop as well.

And then.

In addition to that.

You are able to get shops, maybe two or three times a week or if you are in and close situations that may be just one of them and then with our expense structure. These.

<unk> numbers start to overwhelm some of these retailers, saying we have to diversify this doesn't mean that they are leaving their primary a locations.

<unk> center it just means they need to touch a different shopper and a more convenient atmosphere. So we are seeing we are seeing great strength and like John said. This is just an evolution that is very consistent and youre or even seeing.

Some groups like maybe a sephora thats, even leaning out maybe beyond the higher open air shopping center into more of a.

Power more productive center like that so I think we will see these technicals kantar.

<unk> continued to expand over the next couple of years, which has obviously been a big help to the open air industry.

Thank you that's helpful and another short one.

Kevin has been a possible corporate C&I growth.

On the mobile just touching.

<unk> medicine.

Can you touch on what retailer categories driving this growth.

The full year contribution to be aligned with what we saw.

It is paying us just amount of overdraft, we never thought was possible. So it's really been extremely broad its restaurants. Its the discounters grocery stores. So you name it we're seeing it everywhere.

Experiencing the higher the highest levels, we're even seeing in theaters for experienced the highest level of overdraft, we've ever experienced in the company. So yes.

We expect that trend to continue.

And I'm not showing any further questions at this time I'd like to turn the call back over to John Kite for any closing remarks.

So I just wanted to say again, thank you all for taking the time to join US today and thank you for having an interest in <unk> have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q2 2023 Kite Realty Group Trust Earnings Call

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