Q4 2024 Kite Realty Group Trust Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the 4th Quarter 2024 Kite Realty Group Earnings Conference Call.
Speaker Change: 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 session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I Want to hand the conference over to your first speaker today Brian McCarthy
Brian McCarthy: Senior Vice President, Corporate Marketing and Communications. Please go ahead. Thank you and good afternoon everyone.
Speaker Change: Welcome to Kite Realty Group's fourth 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.
Speaker Change: 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.
Speaker Change: Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release, available on our website, for reconciliation of these non-GAAP performance measures to our GAAP financial results.
On the call with me today from Kite Realty Group.
our Chairman and Chief Executive Officer, John Kite.
President and Chief Operating Officer Tom McGowan.
Speaker Change: Executive Vice President and Chief Financial Officer, Heath Fear Senior Vice President and Chief Accounting Officer, Dave Buell and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw
Speaker Change: Given the number of participants on the call, we kindly ask that you limit yourself to one question and one follow-up.
Speaker Change: If you have additional questions, we ask that you please join the queue.
Now I'll turn the call over to John.
All right, thanks Brian and good morning everyone.
Speaker Change: The fourth quarter concluded an exceptionally strong 2024, highlighting a year of outstanding performance by the KRG team.
Speaker Change: In 2024, we leased 5 million square feet of space, our highest volume in history, and the demand for space in our high-quality centers remains strong.
Speaker Change: allowing our team to improve our embedded growth, establish higher starting rents, and enhance our merchandising mix.
Speaker Change: New and non-option renewal leases signed in 2024 have weighted average rent bumps of 290 basis points, which is well above the portfolio average of approximately 170 basis points.
Speaker Change: This is in large part due to our success in implementing embedded escalators of greater than or equal to 4% in 71% of our new and non-option renewal small shop leases in 2024.
Speaker Change: Pushing our portfolio to higher cruising speed has been a primary focus of our leasing team as we continue to elevate our long-term growth profile.
Speaker Change: For all comparable new leasing activity in 2024, we generated 31.9% blended spreads and a 46.4% gross return on capital.
Speaker Change: While spreads are an important factor in our decision-making, our fundamental objective is to earn a favorable risk-adjusted return on the capital that we invest in retailers.
Speaker Change: In 2024, our non-option renewal spreads were 13.3%, which illustrates our current pricing power and the significant mark-to-market opportunity in our portfolio.
Speaker Change: For comparative context, in 2018 and 2019, non-optional renewal spreads averaged 2.6 percent.
Speaker Change: We leased space to a diverse mix of well-capitalized and highly productive tenants in 2024.
Speaker Change: including Trader Joe's, L.L. Bean, Sierra, HomeSense, Ulta, Aloe Yoga, Kava, Flower Child, and Sephora, just to name a few.
Speaker Change: The wide array of retail concepts and categories growing in our portfolio has well-positioned
Speaker Change: has well positioned us for continued improvement of our merchandising mix and our tenant credit profile.
© The Bulletproof Executive 2013
Speaker Change: Our net debt to EBITDA at 4.7 times underscores the incredible condition of our balance sheet.
Speaker Change: and we are poised to evaluate and act on a variety of internal and external growth initiatives.
Speaker Change: We work diligently and strategically to place ourselves in this advantageous position.
Speaker Change: With approximately $1.2 billion in available liquidity, we can deploy significant capital while comfortably remaining within our long-term average target of 5 to 5.5 times net debt to EBITDA.
Speaker Change: Subsequent to Quarter End, we acquired Publix Anchored Village Commons in West Palm Beach, Florida for $68.4 million.
Speaker Change: coupled with our earlier acquisition of a Sprouts Anchored Parkside West Cob in Atlanta.
Speaker Change: Our reallocation of proceeds from non-core dispositions to the Sun Belt has been accretive.
Speaker Change: Turning to our outlook for 2025, in broad strokes our significant occupancy gains, strong spreads, and enhanced escalators are being tempered by certain non-cash headwinds and recent bankruptcies.
Speaker Change: Despite the short-term disruption, we are heading into 25 with strong momentum and are energized by the multitude of internal and external opportunities in front of us.
Speaker Change: We're swiftly addressing the fallout from tenant bankruptcies by securing higher quality tenants and maximizing returns.
Speaker Change: While the downtime in rent and capital invested in the backfills will delay our anticipated ramp-up of AFFO and cash flow growth,
Speaker Change: In the short term, our long-term value proposition will be significant.
Speaker Change: We are experiencing strong demand for the anticipated vacancies as retailers compete for market share by growing their footprint in high-quality, well-positioned real estate.
Speaker Change: We'll continue to improve the cruising speed of our portfolio by converting the vast majority of our small shop tenants to 4% or higher bumps, and we'll push for improved terms with our anchor tenants, such as shorter option periods, more flexible co-tenancy provisions, and less restrictive use clauses.
Speaker Change: All phases of the One Loudon expansion project, retail, office, multifamily, and hotel, are progressing as planned. On the retail front, we recently signed leases with Williams-Sonoma and Pottery Barn.
Speaker Change: They will be joining names like Our House, Bar Taco, and Tate.
Speaker Change: As for the 400-unit multifamily project and the 170-key full-service hotel, we are finalizing terms with our joint venture partners and anticipate adding these phases to our active development pipeline over the next several quarters.
Speaker Change: The current state of the transactional markets and the significant institutional capital formation for open-air assets gives us confidence that we can continue our capital recycling efforts.
Speaker Change: We will look to sell out of lower-growth and single-asset markets, and redeploy capital into our target markets, investing in assets with a greater percentage of small-shop space, higher embedded growth rates, and lower-cost capital.
Speaker Change: and generally consistent with the centers that we toured during our 4-in-24 series.
Speaker Change: Notwithstanding a potential uptick in activity, our guidance at the midpoint does not assume any impact from transactions as we intend to maintain our approach of match funding acquisitions with proceeds from dispositions in a way that is accretive or neutral to earnings.
Speaker Change: Based on our current leverage levels, we have the capacity to significantly front load our match funding exercises with strategic acquisitions while staying within the long-term net debt to EBITDA target range of 5 to 5.5 times.
Speaker Change: As always, throughout the year, we'll continue our best-in-class disclosure efforts and proactive investor outreach.
Speaker Change: Our 4-in-24 series solidified KRG's distinct advantage in operations, leasing, development, and investment within a highly competitive sector.
Speaker Change: In 2025, our objective is to define a portfolio vision that further separates and elevates our investment proposition and long-term growth prospects.
Speaker Change: Thank you, as always, to our incredible team for their commitment to constantly improving KRG.
together we delivered another very good year.
Speaker Change: While we clearly have work to do in 2025, I look forward to our collective success in achieving our goals.
I'll turn the call to Heath now.
Heath: Thank you and good afternoon. I'm pleased to report 2024 fourth quarter and full year results have outperformed the guidance we gave nearly a year ago. KRG earned 53 cents of NARIT FFO per share and $2.07 per share for the full year.
During the quarter, same property NOI grew by 4.8%.
Heath: driven by a 440 basis point increase from minimum rent, a 30 basis point increase in net recoveries, and 10 basis points of lower bad debt. For the full year, same property NMI growth was 3%.
Heath: with primary contributors being higher minimum rent and net recoveries offset by slightly higher bad debt compared to the historically low levels we experienced in 2023.
Heath: It's important to note that our 2024 year-end same property result is 150 basis points higher than our original guidance and over the past three years our same property growth has averaged 4.3 percent
Heath: Before discussing our 2025 guidance, I wanted to highlight an incremental addition in our disclosure.
Heath: On a go-forward basis, KRG will be reporting and guiding to both NARIT and CORE FFO. CORE FFO serves to eliminate some of the non-cache noise and focus the attention on our fundamental operating results.
Heath: By way of example, as compared to full year 2023, CORE FFO grew 4.7% in 2024, which reflects the strength of our underlying business.
Heath: For 2025, we are establishing NARES FFO guidance of $202 to $208 per share and CORE FFO guidance of $1.98 to $204 per share. Included at the midpoint of our guidance are the following assumptions.
Heath: same property NOI growth of 1.75%, a full year of bad debt assumption of 85 basis points of total revenues, an additional disruption of 110 basis points of total revenues related to anchor bankruptcies.
Heath: Interest expense, net of interest income of $122 million and no impact from transactional activity.
Heath: It's equally important to highlight the more qualitative components of our guidance, which is the enduring commitment to responsibly set expectations based on things we can control while maintaining a visible pathway to health performance.
Heath: To assist in evaluating our 2025 guidance, I encourage all of you to review page 5 of our Investor Deck, which bridges our 2024 NARIT and CORE FFO results to the midpoint of our 2025 guidance.
Heath: As John alluded to, the midpoint of our guidance assumes our strong operational gains are being partially offset by recent bankruptcies, which are acting as a $160 basis point drag on same-property NY growth and a $0.04 drag on NAREIT and CORE FFO.
Heath: These proceedings are unfolding real-time, so we felt it prudent to conservatively estimate that only 5 of the 29 impacted anchor boxes will be assumed by replacement tenants.
Heath: This affords our team the flexibility to make long-term decisions around the best replacement tenants and recapture the space if necessary.
Heath: Looking further down the income statement, certain year-over-year non-cash items are resulting in an additional 5-cent drag on NARED FFO per share.
Heath: As we have previously disclosed, approximately 2.5 cents of this non-cash impact is due to merger-related debt marks, the impact of which significantly abate as we move into 2026.
Heath: Despite all these challenges, at the midpoint of our guidance, CoRFA Foe-Per-Shear is projected to grow in 2025.
Heath: The spread between our leased and occupied rate remains elevated at 240 basis points, representing 27 million of NOI.
Heath: The cadence of this NOI coming in line is set forth on page 6 of our Investor Deck.
Heath: We expect that over the course of this year, the spread between leased and occupied will widen as we aggressively release the approximately 200 basis points of occupancy being vacated as a result of the recent tenant bankruptcies.
Heath: We are fortunate to have the opportunity to address these vacancies in an environment where the inventory for high-quality aquaspace is dwindling.
Speaker Change: As John mentioned, we have wood the chop in 2025, but rest assured that the team is energized and fueled by a culture of outperformance.
Speaker Change: Thank you to the entire KRG team for another incredible year, and we look forward to seeing many of you in the coming weeks.
Speaker Change: Operator, this concludes our prepared remarks. Please open the line for questions.
Thank you very much.
Speaker Change: Thank you. And as a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Thank you.
One moment for a first question.
Speaker Change: Our first question will come from Todd Thomas from Key Bank Capital Markets. Your line is open.
Hi, thanks
Speaker Change: First question, John, you know, you spent some time discussing acquisitions.
Speaker Change: a little bit. You mentioned the balance sheet capacity with leverage at 4.7 times, the target being 5 to 5.5.
Speaker Change: The market's been volatile, particularly with regard to equity capital costs over the last several months.
I understand there's no impact and guidance.
Speaker Change: related to any transaction activity, but can you just provide an update and speak to your current thinking on new investments today and sort of characterize the appetite for capital deployment today?
Speaker Change: Sure. Sure, Todd. Thank you. I think as we were trying to allude to, I mean, we certainly
Speaker Change: You know the markets ebb and flow, but we look at you know acquisitions, and we look at real estate in general in terms of
Speaker Change: You know, what's our ability to make a difference with the asset? What's the long-term growth profile?
Speaker Change: and most importantly, how good is the real estate? So, you know, those are the things that we're focused on, that the volatility does, you know, it comes and goes. So.
Speaker Change: I think, bottom line, you saw that we just acquired a deal in South Florida, Publix Anchorage Center in West Palm Beach, and it ticked all those boxes. You know, fabulous real estate, better growth profile than the overall portfolio that we currently have.
Upside opportunity in the rents
Speaker Change: So, you know, that's the situation where because of our balance sheet
Speaker Change: We can act on it, and we think that's going to be a great asset for us. So beyond that, I think strategically what we were laying out in the prepared remarks
Speaker Change: is we want to continue to pivot towards real estate that insulates us from what's happening right now.
Speaker Change: So, you know, to the extent that we can, and we can do it in an accretive manner or neutral manner, if we can sell an asset that we think is overweighted into
Speaker Change: you know, kind of tenets that we view as long-term risk.
Speaker Change: then we would look to sell that and try to acquire something that isn't.
So that's really the big picture, Todd.
Speaker Change: You know, again, you're correct in saying that the equity cost of that equation, you know, is volatile, and so we have to think through how we would capitalize these things, but we're looking to do it in an accretive way.
Speaker Change: You talked about capital recycling and match funding acquisitions with dispositions. Should we expect to see acquisitions drive dispositions? Or would you consider selling assets first, ahead of anything you might look to acquire? Secondly, just wondering if you could provide an update.
Speaker Change: on the sale of Sadie Center and White Plains, and if there's any impact at all from that, that is sort of embedded in the guidance that you can discuss.
Let me think through the questions, but
Speaker Change: You know in terms of the last question City Center, I mean, let's start with that it is it is on the market
Speaker Change: We have been receiving offers that would validate where we marked the asset.
Speaker Change: So, you know, I think we are anticipating that that would close this year, and so the answer is, yeah, it is embedded in what we're thinking. And then what was the first two of those three questions?
Speaker Change: Just in terms of, you know, the recycling. So, so, yeah, would we buy on the front end? Yeah. I mean, that's market driven, Todd, that's much more market driven. I think we're trying to make the point that if we find something attractive that we think has the right growth profile and the right real estate.
Speaker Change: We could act on that and buy the asset first and then dispose later.
Speaker Change: So the answer is yes, we would do that, and I think it's just kind of market timing.
Speaker Change: And as you know, sometimes we receive offers on assets that are off market, that that also is a possibility that we might move on some things like that. But again, I don't wanna give the impression there's.
Speaker Change: The bottom line is we're looking to control that as much as we possibly can and try to, whatever we're doing, try to do it in a creative manner.
Thank you. Sure, thank you.
One moment for next question.
Craig Mailman: Next question comes from Craig Mailman from Citi. Your line is open.
Craig Mailman: Hey, everyone. Maybe just to follow up on Todd's question, John, you kind of alluded towards front-loading some of the acquisitions potentially. I mean, beyond the deal you just closed down in Florida, I mean, do you guys have anything that
Craig Mailman: is close to, you know, coming across the finish line or visibility? Or was that just a, you know, we could do this if we wanted to because of the battle sheet?
Craig Mailman: No, I mean, I think, look, we're obviously indicating that we're very active in the market like we always are. So we're engaged on underwriting assets. We don't, you know, we don't have anything that we're announcing in terms of something that we're doing after the last acquisition.
but we're definitely actively underwriting.
Craig Mailman: And, you know, so the point is, that's, you know, with this kind of balance sheet affords us that opportunity to do that and then come in later and look to pair that trade. So, you know, that's our objective. But we also want to do it in an accretive way with high quality real estate. So there's a lot of box to tick.
Craig Mailman: But yeah, we're always actively looking and, you know, we'll update as we move along. I think the point, Craig, is that we're at the higher end of our leverage target range.
Craig Mailman: We'd be reluctant to stress ourselves out on acquisitions too far.
Craig Mailman: So by being at four seven you can get ahead of it. You could do it. You could do an acquisition
Craig Mailman: before you do dispositions. And if you get caught in a market where all of a sudden it changes and you can't get your dispositions done...
Speaker Change: I think the other thing to add to that Craig is, you know, Heath mentioned the institutional investor interest in the open-air class.
Speaker Change: That's the other thing that's going on. I mean, there's a lot of private institutional capital that is very interested in being in our business, so that also affords you a little more optionality when you're looking at things as well.
And, you know, I know there's been...
LSA, less positive outcomes.
Speaker Change: on this from others who have tried it, but, you know, with where the stock is trading today, and I know there's volatility around where, you know, the public markets trade, but, you know, to the extent you can sell assets...
Speaker Change: you know, inside of the implied cap where you guys are trading at. I get that, you know, you want to focus on the future, but at what point does share buybacks ever, the math there, kind of become compelling given the guaranteed return?
Speaker Change: Yeah, I mean, very fair, very fair comment question. It's always something that we're analyzing because whenever we're looking at
Speaker Change: in deploying external capital, we have to judge it against that.
so
Speaker Change: It's always there in the backdrop. I think you know what we've said in the past is we were so focused on
Speaker Change: You know, backfilling the vacancies that we had and getting the substantial returns on capital that we were getting in leasing.
Speaker Change: And, you know, the frustrating part of this is that, as you saw over the last two quarters, that was really taking heed with our same story in Hawaii, picking up rapidly, core FFO growing. And then, you know, lo and behold, we get hit with this new round of bankruptcies, which we hope is...
Speaker Change: you know, near the end of those potential things that can happen.
Speaker Change: So, you know, it's it's another thing that we have to deal with that we are now looking at applying that capital that we could have otherwise deployed to a share repurchase to leasing up space. And by the way, getting, you know, 30, 40% returns on capital. So it's great.
Speaker Change: But yeah, I mean, long answer, but it's always something that we're going to underwrite when we think about deploying external capital.
Great, thank you. Thank you.
and Kim Stacy. Thanks.
One moment for our next question.
Speaker Change: Our next question will come from the line of Jeffrey Spector from Bank of America Securities. Your line is open.
Great, thank you. John, I'd like to
You know the you just said a comment around
Speaker Change: owning real estate that insulates you from what's happening right now. And I think the concern, right, is that this is just part of the business. But it sounds like you're saying, I don't know if you feel like by 26, like, do you feel that there's a certain percent of the portfolio that.
Speaker Change: will be more insulated based on the credit quality of the tenants today, right? Because there again, there's just this concern that we walk into next year and there'll be another slate of retails that file. Right.
Speaker Change: Yeah, great question, Jeff, and appreciate it. I think, yeah, our view is that when you look at what's happened over the last couple years,
Speaker Change: You know, these bankruptcies have been occurring in a very strong environment for us to backfill them, so that's a real positive.
voiced frustration on in the past is the fact that
Speaker Change: The struggling retailers, they tend to hang on and hang on, and we're put in positions where...
Speaker Change: you know, kind of file all at the same time. And, you know, we were a little over-weighted in that category, and that's something we're very focused on eliminating.
Speaker Change: So you'll never fully eliminate, you know, credit issues in any business.
Speaker Change: But if you can insulate yourself against it and weight yourself down, and what we mean by that is, obviously, if you look at the distribution of our type of properties,
You know, we're in the neighborhood grocery acreage center business.
Speaker Change: We're in the community grocery anchored center business. You know, we're in the lifestyle business and we're in somewhat of the power center business.
Speaker Change: And it's that last leg that we're looking to have less of. Now, that being said, it generates consistent free cash flow that we can redeploy. So you have to do that within reason. So I think what we're saying is
Speaker Change: We are looking to improve our portfolio such that it insulates us against it. It'll never completely eliminate it
you know, um...
Speaker Change: you know, kind of businesses that haven't reinvested in their own platforms, they go away. Most of that is, you know, it's not all gone, Jeff, but it feels like we're in a better spot.
Okay, thanks. That's really helpful, John.
Speaker Change: And then, I have a follow-up for Heath, and I apologize, I...
Speaker Change: couldn't hear it. Heath, at one point you were talking about in the guidance, right, the conservatism. And so, and I think you said something around like maybe out of the 29 replacements, you're only reflecting five.
Speaker Change: can you repeat that and maybe discuss that a little bit more some of the conservatism let's say in the guidance some of the the reach like where you can be towards the top end and maybe that even includes
shrinking the time it takes to backfill. Thank you.
Speaker Change: So Jeff, as you know, these bankruptcies are unfolding real time. And so we're giving our best data we can and using it to make assumptions. And the assumptions we're making is that basically,
Speaker Change: as you said, of the 29 bosses being impacted by these series of bankruptcies.
We only have five of them being acquired.
Speaker Change: One of them is a big last, which we think is going to be a growing concern, and then four of them are our party city locations.
Speaker Change: I will tell you for Party City, we had bids on a total of eight of them.
Speaker Change: Two of them were straight-up assumptions, so those ones are going to be assumed. That's part of that five. And then another six of them...
Speaker Change: The purchaser bought lease designation rights, which basically gives them the right to assume the lease, but it really is an entree for them to call us.
and to negotiate.
You know of it.
Speaker Change: a term change. So we're assuming maybe of those six, another two of those end up into real deals. That gives us the five.
Speaker Change: So, as you can tell, again, we still have to hear what's happening with Joanne and their auction.
Speaker Change: So there's a version, Jeff, you know, that there'll be more than five, which I think is an opportunity for us.
Speaker Change: to outperform. But as John said, we want to make sure that the replacement tenant is someone that we're happy with, that's going to be accretive to the merchandising mix, that has a good balance sheet.
Speaker Change: So there may be a version where some of these if someone is bidding even though we could take the short-term gain of no income disruption
Speaker Change: and just go ahead and let them assume and not put any capital into it. We don't want to kick the can on the problem. But just like the discussion, just have a job.
Speaker Change: You know, we are actively looking for ways to reduce exposure.
to some of the names that cause us concern.
Speaker Change: We can do that by A, by trying to not renew them, recapturing space in these kinds of instances.
Speaker Change: or perhaps selling assets that have, you know, an exposure to these tenants that have long duration on their terms. So, it's a multifaceted approach to try to reduce it. But again, you're right. Is that a conservative assumption? It is. But, you know, as I said in our...
Speaker Change: In our remarks, you know, when we give guidance, we try to set expectations reasonably. You know, the top end of our range are things that we have vision of and there are sources of outperformance. And the bottom end of our range is really insurance against, you know, things that we can't see.
Speaker Change: So, that's kind of how we approach it. And I think we'll have a little better clarity on Joanne's probably in April. So...
Speaker Change: Between between Party City coming through and being able to negotiate with Riley who will be assigned to us and then Coming up with Joanne's we'll have pretty good clarity. I think in the next couple months
Speaker Change: Hey Jeff, you had a second part to your question about how long it takes to open tenants.
Speaker Change: and that's absolutely a major focus and when we're when we look at that and we review opportunities with new tenants
and we have this, we have this ability to...
you know, push opening dates, we do that.
Speaker Change: And I think we're going to have to do a much better job of that going forward. That, you know, a lot of the things that take time...
Speaker Change: For example, if you're doing an anchor lease and, you know, the tenant's not going to open for 18 months.
Speaker Change: We just can't let that happen. We have to push it and we have to make it happen faster So that that is something that we're focused on and will be focused on and in regards, you know you know, I just want to say in regards to the
Speaker Change: to the guidance, and more particularly, the bad debt. I mean, obviously, when you look at the amount of bad debt reserved that we have, it's the start of the year. And we're going to be conservative in the start of the year.
Speaker Change: If you look at what's happened with the company in the last several years, we've outperformed our initial
Speaker Change: expectations, but you have to put yourself in a position to absorb the unknown and until it becomes more known
Speaker Change: then that's when we would update everybody. But we feel very good that we're in a position to move quicker, but we wanna make smart decisions around the merchandising mix. I think that's, we've given ourselves that ability to do that.
Thank you. Thank you.
Speaker Change: Our next question will come from Flores Von Dick Toom from Compass Point. Your line is open.
Hey, guys. Good afternoon.
I had a follow-up question on capital recycling. You have...
two big land parcels that are currently
Speaker Change: as far as I'm aware, not yielding anything. Could you talk about the entitlement...
Speaker Change: on those, one in Ontario, one in I think Largo, Maryland, and what the appetite would be
for those two pieces of land longer term.
Yeah.
Speaker Change: I think as we said before, both of those are examples of parcels that we look to.
Speaker Change: enhanced the value vis-a-vis the entitlement process and then highly likely that we would dispose of those to a third party to develop so
Speaker Change: In both of those cases, we are in that process, and we have added significant value by having
Speaker Change: vis-a-vis the entitlement process. Can't give you timing, but absolutely there is real opportunity there, and you are correct. They are creating, you know, no yield for us at the current time, so it's all upside.
Speaker Change: the process of getting site plan approvals and all the various regulatory items are well underway on both.
Speaker Change: And is it correct that something close to like 1,600 units could be built in Ontario?
I don't I don't think we've
Speaker Change: disclosed exactly what that is yet because we're in the process of that entitlement, that specific entitlement, but it's a large piece of ground and there is real desire in that community for residential and you know unfortunately it became even more desirous with the events and
the tragic events in L.A. in terms of housing.
Speaker Change: So, yeah, I mean, that's ongoing, and that's why we think we're going to create a lot of value there, Flores. Yeah, so the request for proposals really lay out what can be done on the property in terms of capacity, and then we're asking each of these.
Speaker Change: potential buyers to come up with their plans and then from there we'll review each and every one and make decisions.
Speaker Change: And then maybe my follow-up, if I may, just talk about, again, the
Speaker Change: The the momentum that you have right now particularly on your shop occupancy as well. What it's I think in 91.2
Speaker Change: Where could you see that going later this year? I know you've talked about seeing maybe a potential drop in physical occupancy as you deal with some of this disruption impact.
Speaker Change: How does that impact your ability to lease and continue to grow your shop occupancy?
Speaker Change: Yeah, we don't think this is going to impact our ability to do that at all.
I mean, generally speaking, these retailers that
are going away, we're not additive.
Speaker Change: quite frankly, to the centers themselves. So if anything, it's a lot of upside there. And our shop, our shop occupancy is growing, as you know.
pre-COVID.
Speaker Change: is 92.5%, now it's 91, meaning that we have a lot of opportunity. Now, we've also been very, very diligent around doing the right deals, getting better growth.
Speaker Change: and that's why we pointed out the 70% of the deals that we did. That's a big number, 70% in the shop space. We're at 4% bumps or better. Over time, that generates more cash flow that is very meaningful.
Speaker Change: So I don't think at all that the bankruptcies will impair our ability to do that. And if anything, the replacement tenants that we bring in will actually add to our ability to lease the shop space.
Thanks John. Thank you.
One moment for our next question.
Thank you. Thank you. Thank you.
Unidentified Moderator: Next question comes from Paulina Rojas Schmidt from Green Street. Your line is open.
Speaker Change: © 2019 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Creative Services
Hello, everyone.
Retailers often have extension options, right?
Speaker Change: Do you think it's possible for landlords, given how good the leasing environment is, to start thinking about...
Speaker Change: negotiating lease clauses where they can have recapture rights if a tenant's health falls behind a certain predetermined level. It seems to me that the
Speaker Change: the tenants that are currently in bankruptcy have been struggling for such a long time and that you would have benefited from gradually recapturing the space.
Speaker Change: Yeah, Paulina, it's a good question, and quite candidly, we already have situations.
Speaker Change: and our best properties where in the option periods, if the tenant isn't doing the predetermined amount of sales,
Speaker Change: that we determine as successful in that particular lease, then that option, you know, goes away. So there are, in the best centers we do have that.
Speaker Change: During the primary term, it would obviously be very difficult to do that based on the amount of capital that our partners put into their own spaces, or the retailers.
Speaker Change: So, I mean, I think that the bigger picture is, the strength of the business is fundamentally better than it was despite these...
Speaker Change: you know, setbacks that you have for periods of time, the strength is still there. So we are very focused on what we said in the in the in the remarks, which is to make these more flexible, particularly like around exclusive uses.
Speaker Change: things of that nature, co-tenancy provisions. We need these leases to be more flexible that would near our ability to make moves quicker.
Speaker Change: So, I think it's all part of the same bucket, and look, this is a...
Speaker Change: unique relationship between the landlord and the retailer. It is a customer partner relationship. We value these relationships. They're very important to us. And as we grow and own better assets, those relationships become stronger.
Speaker Change: So I do think we will get there and we will make those improvements and to some degree they already exist
okay
and then I'm thinking about your assumption of
Speaker Change: Why wouldn't a large share of them be assumed? Would it deterring a more successful pool of leaders for this?
Speaker Change: I don't think anything's deterring that. And I think we're clear that five is a conservative estimate. And he pointed out that we actually had another four that a particular retailer.
Speaker Change: essentially bid on the rights to the lease even though there were no options there.
Speaker Change: before we just put that tenant in a space because it looks good on a quarterly run rate basis versus a long-term value basis.
Speaker Change: So, I think what we're trying to make sure our investors understand is we want to create long-term value, not short-term value. And we understand that it creates difficulties sometimes.
but
Speaker Change: I would be quite surprised if the number wasn't higher than five, but we want to do it in a diligent way, make the decisions.
Speaker Change: and make sure we're putting the best retailers in there. And Paulina, from an overall interest level, and who we're talking to and who we're exchanging letters of intent with, that doesn't include that list. It's just the list of...
Speaker Change: of the four that John talked about. But another example would be on a deal that someone has a designation right.
Speaker Change: on a Party City deal, we have a location next to it that we could combine spaces, do a grocery. So we want to be really thoughtful on each and every one of these to make sure we get the right one. And I think we've laid this out properly to give us maximum flexibility.
Speaker Change: That makes sense. One last one. When you think about the anchor boxes and the different size ranges, let's say 10 to 20, 20 to 30, and then over 30,000 square feet, what bucket is the most challenging to backfill today?
Speaker Change: Well, generally speaking, the larger you go, the more challenging it gets, but not in the sizes that you described. It's really once you get north of 40,000 square feet, it becomes more complicated.
Speaker Change: And if you think all the way back to the old Sports Authority bankruptcy years ago, that's an example of boxes that were larger that took longer to backfill. Now in this particular round, it's actually much more attractive, particularly Party City.
Speaker Change: because these are less than 20,000 square feet. So they tend to be not as deep as some of these other larger boxes, which gives us much greater optionality on carving them up and maybe even doing say a 6,000 foot tenant and some small shops, which would have better growth.
Speaker Change: So, you know, but it also makes it attractive as you pointed out to tenants that want to just assume the leases So I think again, I think we're being Prudently conservative, but you know, we were looking to try to outperform
Speaker Change: And Joanne's a big loss, just size-wise, as you're looking in those strong categories of the 20s to the 30s. This gives you a lot of...
a lot of flexibility with the value players.
Speaker Change: and all the other people that are looking at it. So we're very fortunate that we have the range of the 10s, the 20s, and some 30s.
gives us max flexibility.
Thank you, that makes sense.
and John Kite. Thank you.
Speaker Change: Our next question will come from Alexander Goldfarb from Piper Stanzer. The line is open.
Hey, good afternoon out there. So, two questions. First, John,
Speaker Change: You're you're a straight shooter, you know, you like to call it as it is and like to focus on cash flow and the dividend And not make excuses. So I'm just curious the decision to go with a core FFO I mean they read FFO has warts. We know that but it is what it is. It's a level playing field
Speaker Change: Just sort of curious why introduce core you guys have spent a lot of focus talking about dividend Talking about bottom line cash flow growth. So I'm just curious why the core
Sure.
I appreciate the preamble of being a straight shooter.
Speaker Change: Quite, quite honestly, we aren't, we aren't replacing NARIT with CORE. We're adding CORE, so we'll be guiding to NARIT and CORE. And I think, Alex, you mentioned about our focus on cash flow. CORE is cash flow, right? CORE is much more cash driven.
Speaker Change: So I it isn't it's just something that you know, by the way others do it as well But for us we you know, we just want to make sure that the investors can see as much as possible
Speaker Change: With you know in terms of and it's why it's called core in terms of the core operation of the business
Speaker Change: and it's up to investors to judge whether they want to be looking more to NARED or looking more to CORE. We're just putting it out there as another, you know, metric to follow and, you know, and to give you an example, I mean, if you just look at
Speaker Change: you know, where we were headed in in the year and you look at what happened in the last couple years core has been growing nicely. And you obviously have had to deal with a lot of non cash
Speaker Change: accounting associated with the previous merger. So it isn't, we're not trying to replace it Alex, it's just an addition.
Speaker Change: Right, but to be fair, John, when you guys did the merger, like, you know the accounting, so that's, I, and I get it that the accounting is wonky. I'm not debating that, but, uh, you know, it's sure.
Speaker Change: Anyway, I guess we've been thinking about it and we're starting in now, but we're certainly not moving away from NARIT FFO.
Speaker Change: Okay, second question is, you know, just sort of a lot of the questions are on the on the bankruptcies and the impact, especially more so for you guys and some of the other peers. But I guess the question is, do you, you know, yes, there's an outsized hit versus
Speaker Change: the other companies from these, this, you know, four or five group of pennants.
Speaker Change: But is your sense that there's a bigger watch list like there were comments about
Speaker Change: There are other tenants to work through to improve the credit quality of the portfolio. So I'm just curious. Are there other tenants that you guys are focused on to sort of eradicate from the portfolio? Or is it really just...
Speaker Change: bad luck of cards, you got a bunch of these tenants back, and this is all you're dealing with. And that's where those credit comments were were focused on.
Speaker Change: I think it's more the former and I and I don't know that we necessarily
Speaker Change: got a bunch more back. I think we were just more conservative in what we assumed in terms of the leases that would be assumed. I think that's the just if you just look at the bad debt that we laid out there versus, you know, some some others. I think that's the difference. Yeah, and it's more...
Speaker Change: What we're trying to say, Alex, as we continue to improve the portfolio...
Speaker Change: Yeah, we're looking to have less box exposure. We're not looking to have zero box exposure. So that's all we were trying to say.
Thank you, John. Thank you very much.
Thank you. One moment for our next question.
Bye. Bye. Bye.
Unidentified Moderator: Our next question will come from the line of Michael Mueller from JP Morgan. Your line is open.
Michael Mueller: Yeah, hi. First, I guess, what is the pool size for the potential dispositions that you flagged when you were talking about the single-tenant assets and the lower-growth markets, if you roll them all up, about how big is that pool?
Michael Mueller: You know, we haven't laid that out in terms of the total size of it. I mean, we've always said that, you know, when you look at the total portfolio, there's probably, and this is just a swag number, there's generally 10% of that portfolio that you think
Geez, I'd like to reposition these assets.
But, you know, we also think about that.
in terms of
Michael Mueller: You know, we want to do it in a thoughtful way that is, you know, as we said, a creative or at least neutral.
Michael Mueller: I think there's probably three or four of those, six of those, sorry, where we have one asset in a state, so that's probably where you start. And then, you know, we have a couple of these lower growth profile assets that we would add to that.
Speaker Change: Got it, okay. And then I think you said in the comments that about 70% of the shop leases that you signed, I think this was in the fourth quarter, had bumps that were 4% or higher and I'm just curious like what tenants, what types of tenants are signing leases that have bumps greater than 4%?
Speaker Change: first of all it was the 70% was for the full year okay and you know it generally speaking first of all obviously we're talking about small shop tenants
Speaker Change: You know, we've signed that are at like four and a half percent growth. There's obviously not a lot of fives. And we're cautious around...
Speaker Change: You know the growth obviously adds up over time so we're cautious around what these tenants health ratios would be.
but, you know, high-volume restaurants.
Speaker Change: service providers, service players, guys like that, sometimes the larger franchise operators.
Speaker Change: Again, it's really property specific. A lot of these properties don't have a lot of vacancies, so when there's a shop that comes up in a really strong property, we have two, three, four people looking to get the space. So it's competitive that drives some of that, too.
Got it. Okay, thank you. Thanks a lot.
Thank you. One moment for our next question.
Speaker Change: And our next question will come from the line of Linda Tsai from Jeffries. Your line is open.
Linda Tsai: Hi, thank you. Of the five party cities where a retailer has lease designation rights, in terms of the range of outcomes, what would you consider a favorable outcome versus a less favorable one?
Speaker Change: Well, Tom, Tom, why don't you hit that? Yeah, here's what I would say. One of one of them.
Speaker Change: relates to a term that is very minimal, say six months, so Riley, one of their advisors, will come to us and try to negotiate that.
Speaker Change: So what we'll do in that situation most likely is say if we can do better
with a new tenant.
Speaker Change: and expand and get the quality up to where we want to be, then we would not take that deal. We would not negotiate.
Speaker Change: Another scenario where maybe a less attractive space in the center around an elbow
Speaker Change: That could be a situation where we say, hey, this is likely a good deal. We keep the rent stream on. We do not have to put in capital.
Speaker Change: So each decision will be done on its own accord, but we have a pretty good strategy in place for the designated stores.
Speaker Change: And then, you know, we plan to implement those. But it's pretty clear and dry in terms of our direction on each one. But, Linda, I think if you heard Heath's comments, the other factor that we're focused on is
Let's say a particular retailer designated for eight spaces.
Speaker Change: You know, do we really want to do a deal with any retailer and automatically grow that by eight spaces? You know, and these are junior anchor or anchor spaces
Speaker Change: So we wanted to be able to slow the process down to take them one at a time. And I think, you know, maybe others are taking a different approach, just fill the space as fast as possible. But, you know, so I think merchandising mix is just as important.
Speaker Change: frankly, more important than the speed at which you backfill that space. Absolutely.
Speaker Change: Thanks for that context. And in terms of being active on the transaction front, who are you competing with primarily on the assets you're looking to buy?
Speaker Change: You know Linda, it's a very deep pool and it's one of the things that we mentioned in the pre-prepared remarks was that the amount of capital that is queued up
And it's like, for example, dry powder.
Speaker Change: looking to deploy into open-air retail has really grown. I mean I can't give you the exact metric but it feels feels like two or three fold in the last couple years. So when you're looking at a high-quality asset you're competing against
Speaker Change: pension funds, insurance companies, sovereign wealth funds, REITs, 1031 buyers, local sharpshooters that have maybe one of those as a capital partner.
Speaker Change: So it's quite extensive. And that's good. I mean, you know, it's good that I think we've crossed Rubicon.
Speaker Change: of, you know, do people want to be in retail? Hell yeah, they want to be in retail. I mean, this is a good business. Yes, it has its hiccups. Yes, we're frustrated that we got put in this position after turning the corner with really strong growth. But that growth's coming back, and it's going to come back even stronger as we redeploy the capital.
Thanks for that.
Thank you. Thanks, Wanda.
Thank you. One moment for our next question.
Moderator: Our next question comes from Alec Fagan from Baird. Your line is open.
Hi, thank you for taking my question.
Moderator: Kind of thinking through, you know, the overall vacancies, especially on the anchor side, have you been selecting and in contact with potential tenants that you would want to bring into the centers to kind of improve overall traffic or merchandising mix?
Speaker Change: Yeah, I mean absolutely. We spend time targeting these customers. We get in front of them and spend a lot of time on that as it relates ultimately back to our leasing strategy for each center. So that's a big part of what we do each and every day.
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Speaker Change: And would you be able to talk about the type of tenants that you're seeing demand that you would want to target?
Speaker Change: Yeah, I mean, I think if you take a look at our list, grocery has always been a primary driver for us.
Speaker Change: due to the traffic generation, and we have the ability to not just take one space, but potentially expand into others. We have the Norsum Racks, we have the value players of HomeSense, the TJs, we have some great fitness and boutique fitness.
Speaker Change: extremely strong group of tenants that we've done as new offerings, Whole Foods, HomeSense, Trader Joe's, it goes on and on. So we have quite a stable to pick from. I think most important metric though that we gave you was, I think we did 22 anchor deals.
Speaker Change: in 2024. That just sums up what Tom was saying in a nutshell. Tons of depth.
Thank you, guys.
Speaker Change: Thank you. This concludes the Q&A for today. I will now turn it over to John Kite for closing remarks.
John Kite: Great. And again, I want to thank everybody for taking the time to be with us this morning. And I want to thank our team and we look forward to the challenges ahead and look forward to continuing to do what we do. Thank you.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.