Kite Realty Group Trust Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Third Quarter 2024 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Brian McCarthy, Senior Vice President, Corporate Marketing and Communications. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to Kite Realty Group's Q3 earnings call. Some of today's comments contain forward looking statements that are based upon 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 ks.

Speaker 1

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 are 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, Dave Buell and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. Given the number of participants on the call, we kindly ask that you limit yourself to one question and one follow-up. If you have additional questions, we ask that you please rejoin the queue.

Speaker 1

I'll now turn the call over to John.

Speaker 2

Thanks, Brian, and welcome everyone to our quarterly conference call. KRG delivered another very strong quarter, leasing approximately 1,700,000 square feet of space, which is the highest quarterly volume in the company's history. Heath will walk you through the details of our quarterly results and our updated 2024 guidance. And I'll focus on the progress we continue to make on the leasing front and our longer term growth levers, including the recently announced development project at One Loudoun. Over the last 3 years, the primary focus of our capital allocation efforts has been leasing.

Speaker 2

Our portfolio now sits at 95% leased, which represents 160 basis point year over year increase. We're optimistic that this environment we can continue to drive both the anchor and small shop occupancy to historical heights. Year to date, we've executed 17 anchor leases at 38% comparable cash spreads and 33% returns on capital. Demand continues to be strong in both our anchor and small shops. Year over year, our small shop lease rate is up by 100 basis points as a result of signing over 180 new leases with tenants spanning a wide spectrum of complementary uses.

Speaker 2

The credit profiles of our new small shop tenants are also strong and these leases are expected to generate a 57% return on capital. Our sign not open pipeline remains elevated at $33,000,000 It's important to note that the average ABR in our sign not open pipeline is over $26 which is nearly 25% above our current ABR in the portfolio. Based on the current leasing velocity, we expect our sign not open pipeline to stay elevated through the first half of twenty twenty five and start to drift down to our historical average as we head into 2026. As KRG enters the latter part of our lease up phase, we remain acutely focused on levers of growth beyond occupancy gains. The organic mark to market opportunity embedded in the portfolio continues to be strong as highlighted by the year to date blended non optional renewal spreads of nearly 13%.

Speaker 2

We consistently promote this statistic as the most reliable indicator for movement of market rents as it's not influenced by landlord capital. We're successfully driving higher embedded growth, especially on the small shop front. For new and non option renewal leases signed in the 1st 3 quarters of 2024, the average annual growth was 3.5%, which is 50 basis points higher than the small shop new and non option renewal leases executed in 2023. The progress we've made over the past 3 quarters represents a significant step towards our long term goals of generating a more sustainable stream of cash flows and driving an outside cruising speed for NOI growth. On the development front, we recently announced our expansion plans for 1 Loudoun in the Washington DC MSA.

Speaker 2

As we detailed in our 3rd installment of 4 in 24, the development will include 86,000 square feet of retail and 33,000 square feet of office. We're also in the late stage negotiations with 2 developers to incorporate 170 room hotel and a 400 unit multifamily complex into this next phase. Our philosophy on non retail uses for mixed use projects is to manage our capital contribution while maintaining a stake in the project. We'll share our plans for both the hotel and multifamily phases once the agreements are finalized. One of the takeaways we communicated at our 4 in 'twenty four event was our significant amount of developable land adjacent to

Speaker 3

One

Speaker 2

Loudoun. Excluding the proposed next phase, we have entitlements for an additional 1300 multifamily units and 1,700,000 square feet of commercial GLA on over 30 acres of entitled land. While we're focused on executing this next phase, we have plenty of optionality for additional phases to continue creating value. One Loudoun is on track to becoming one of the premier open air mixed use projects in the country. While on the topic of premier open air mixed use projects, we hosted our 2nd installment of our 4 24 Series at South Lake Town Square in the Dallas MSA, which is currently our largest asset.

Speaker 2

When we took control of this property in 2021, it was generating just over $20,000,000 of NOI. 3 years later and Southlake is producing over $30,000,000 of NOI, which speaks to the intensity of our leasing platform and the underlying quality of the real estate. The combined impact of One Loudoun and Southlake on KRG as a whole is extremely compelling. While generational assets like these trade infrequently, there's one currently in the market and another that will be in the market by the end of the year. We're confident that these assets will trade at levels which will underscore the importance of One Loudoun and Southlake to our portfolio.

Speaker 2

This past quarter, we acquired Parkside West Cobb, a Sprouts anchored shopping center in the Atlanta suburbs for $40,000,000 We locked up this property in advance of the recent compression in cap rates, which allowed us to acquire this asset at a positive arbitrage to the asset we sold in Chicago earlier in the year. For the past several years, we've been disciplined in our desire to remain relatively net neutral on our buying and selling activity. It's important to note that the number of high quality assets in the market continues to increase as does the liquidity for all OpenAir product types. With our current leverage meaningfully below our long term targets, KRG is well positioned to take advantage of any compelling opportunities that may arise. Our Board of Trustees has authorized an increase in our dividend to $0.27 per share, which represents a 3.8% sequential increase and an 8% increase year over year.

Speaker 2

As occupancy and NOI ramp up over the next few years, we anticipate our dividends follow suit. For many of our long term investors, the dividend is a critical aspect of REIT investing. And with the strength of our balance sheet, KRT's dividend is an extremely attractive risk adjusted yield. In closing, thank you as always to our incredible team for their hard work and dedication. But before turning the call to Heath, I wanted to specifically recognize the dedication and grit of our Southeast team for their efforts related to the recent hurricanes.

Speaker 2

As a result of their vigilance and preparation, our assets suffered minimal damage and downtime. We proudly serve our Southeast customers and our communities and are grateful for their support and patronage. I'll now turn the call to Heath to walk you through results in 2024 guidance.

Speaker 4

Thank you and good morning. For those of you that have attended 1 or more of our 4 in 24 events, we are grateful for your time and travel efforts. We will be hosting our final event in Las Vegas on November 18, which is the Monday prior to the Navy conference. We hope to see many of you and look forward to sharing our views on capital allocation and providing a glimpse into our long term vision for KRG's future. While the response to the 4 24 series has been overwhelmingly positive, you can rest assured that the intellectual property rights to 525 are currently available.

Speaker 4

Turning to our results for the Q3 of 2024, KRG earned $0.51 of NAREIT FFO per share and generated same property NOI growth of 3 80 basis point increase in minimum rent and 120 basis point increase in net recoveries, offset by 80 basis points of bad debt relative to the comparable period. Based on our Q3 results and revised outlook for the balance of the year, we are increasing our 2024 FFO guidance by $0.01 at the midpoint to a range of $2.06 to $2.08 primarily driven by improvement in our same property NOI growth assumption. At the midpoint, we assume a full year same property NOI growth assumption of 2.75% and a full year bad debt assumption of 70 basis points of total revenues. The full year bad debt component is a function of combining the actual bad debt we experienced year to date, which was approximately 60 basis points of total revenues with the continuing assumption of 100 basis points of bad debt for the 4th quarter. As our updated guidance implies, we are anticipating an acceleration in same property growth for the Q4 due to the commencement schedule of our sign out open pipeline and the favorable comparable period.

Speaker 4

In August, we returned to the public debt market by issuing a 7 year $350,000,000 bond at a coupon of 4.95%. We felt it prudent to minimize the capital markets risk heading into 2025 and we are pleased with the execution. On our July earnings call, we mentioned that we anticipate a significant improvement in credit spread compared to the levels we achieved in January. And we were able to achieve a 38 basis point compression in a spread in less than a year. As for the proceeds, we are currently holding them in a short term deposit account generating interest income in excess of the yield and the debt maturing in 2025.

Speaker 4

In September, we amended and extended our $1,100,000,000 revolving credit facility, which now matures with extension options in October of 2029. With a very dynamic macro environment in front of us, it's important to note that our availability under the line of credit together with our cash on hand can satisfy all of our maturing debt through the Q3 of 2028. Looking through a more opportunistic lens with over $1,200,000,000 of available liquidity and a net debt to EBITDA of 4.9 times, we have the ability to deploy significant capital while still remaining within our long term leverage target levels of 5 to 5.5 times. Thank you to the entire KRG team for another spectacular quarter and we're looking forward to seeing many of you in Las Vegas. Operator, this concludes our prepared remarks.

Speaker 4

Please open the line for questions.

Operator

Thank Our first question is going to come from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open. Please go ahead.

Speaker 5

Hi, thanks. Good morning. Heath, seems like a little bit of a better outcome in the Q3 than you previously talked about. I think you talked about the Q3 being a little more muted and followed by a sharper increase in the Q4. It sounds like that's still the case, but where did you outperform versus expectations in the quarter?

Speaker 5

And was any growth this quarter pulled forward from the Q4? And then as we think about ending this year and into 2025, any sort of goalpost that you can put up around the next few quarters around the trajectory for NOI growth?

Speaker 4

So Todd, I'm basically thinking just doing better on bad debt was the primary driver of what gave us a little bit better outlook into the same store for this particular quarter. And I wouldn't say that we pulled forward anything from the following quarters. In terms of the trajectory of the same store for 25 and beyond, we're not going to give guidance at this time, but we said before in our remarks that we're pretty bullish and optimistic with respect to the occupancy contributions we're going to see in our signed unopened pipeline. So I'll leave that to our 20 25 outlook.

Speaker 5

Okay. And then my second question for John, curious to just get a little more color on the acquisition environment and also the assets that you mentioned that are being marketed or on the market that you're comparing to 1 loud in a bit in that sort of ilk. Is Kite interested? What's the company's appetite like for being on the buy side of a transaction like that and adding another asset like that to the portfolio today?

Speaker 2

Sure, Todd. I mean in terms of your macro question, I think the environment is strong. There continues to be more and more capital flowing into Open Air Retail from as we've talked about before all sources that you can imagine pension funds, sovereigns, insurance companies, REITs, 1031 buyers, advisors. I mean I really think that the volume of capital that's flowing into our space in the past 6 to 9 months is dramatically increased over the previous year. So that obviously leads to compression in yields that people are willing to accept as well as the growth rates in these assets are clearly better than they were historically.

Speaker 2

So all in all, I'd say it's a very competitive market. As we mentioned in the pre prepared remarks, yes, there are assets that are now coming into the market that are similar to centers like South Lake and One Loudoun and Crown and Union Hill and I can go on and on. I mean, we have a lot of assets. We mentioned 2 of them, but we have a lot of these high quality assets that I think people maybe don't quite think of when they think of our company. So that's our goal is to make sure people do understand that.

Speaker 2

As it relates to would we participate in something in assets of that nature, would we look to buy those? That's why we specifically mentioned our balance sheet. We believe that we have, if not

Speaker 3

the best, one of the very few best in the space. And again, don't feel like they're quite recognized for that. Debt to EBITDA at 4.9 times is dropping. We have a lot of firepower, a lot of optionality. We're going to absolutely be looking at what's available as we always do.

Speaker 3

And if we feel like we think that we can add value and appropriate returns, we're certainly in a position to execute that we so chose. I think what we're trying to say is that we're undervalued as it sits today. The good thing is we have so much capital and our balance sheet is strong and our cash flow is growing and we can still participate in the market if we choose to.

Speaker 5

Okay, great. Thank you.

Speaker 3

Thanks. Thanks, Pat.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Alexander Goldfarb with Piper Sandler. Your line is open. Please go ahead.

Speaker 6

Sure. Good morning out

Speaker 7

there. John, maybe just keeping with that theme of going on looking at more centers to buy some of these potential larger centers. One of the things that you've spent many years, almost a decade doing is improving the balance sheet, getting really low leverage and putting the company in a really good spot at the same time. Unfortunately, the stock continues to trade at a discount versus peers. So how do you balance increasing leverage to buy assets if that risk sort of goes against what you guys have tried to do, which is say, hey, we've got a great company, great cash flow, great leverage, therefore deserve a higher equity multiple?

Speaker 3

Yes. Moving back to Alex, moving back to you. That's a great question. I think that's the point we're trying to make is that we do have a great balance sheet and having a great balance sheet affords you that optionality. So I think we have to look at each individual opportunity under that lens of what is the potential growth rate of the asset, what value does it bring to the total portfolio and what comfort level did we have impacting the balance sheet to the asset and or assets in full.

Speaker 3

So but when you're sub-five and we've been clear that our long term goals and objectives are low to mid-5s, that's a lot of runway. So I think Alex, it's just I don't think we can say it's one thing. I think we have to look at each individual component of what we're pursuing to say does this add value to the overall business. But again, where we are today, we have plenty of room. So I think that we're studying and looking and see what happens.

Speaker 3

But again, if it doesn't happen, we continue to generate free cash flow out of the existing portfolio. Frankly, if we did that, we would continue to delever and that just creates even more optionality.

Speaker 7

Okay. Second question is, you mentioned residential, which you showed us at One Loudoun. As you guys have been assessing the portfolio and more investment opportunities, is there a sense of how much multifamily potential there is in your existing portfolio? And also is that something that is actively on your investment plans to say, hey, let's add more multifamily, just trying to get a sense of this one loudness more space or if there's a lot more across the entire Kite portfolio?

Speaker 3

Well, I mean, I think as you know, Alex, we generally don't set these numbers out there and say we don't have to go chase them. I would tell you that we currently have an equity interest in, I think, about 1400 units. We mentioned that the next phase of Loudoun is going to be another 400 units. And I think we mentioned on top of that, there's another 1400 units there alone entitled. As it relates to the balance of the portfolio, we generally let the legal state do the talking.

Speaker 3

So, we're not going to go out there and say we have to have 5,000 entitled units. The reality is we will have several more 1,000 units over the next few years that we can pursue if

Speaker 2

we choose

Speaker 3

to. But again, I mean, the real estate needs to talk to us. The returns have to make sense. And we generally like to have partners and share the risk and manage our capital contributions going in. I know some others don't do that, but that's what makes sense for us.

Speaker 3

So it's a part of the business. It's really this densification is clearly a part of the business. And as we pointed out, we have a lot of these high end assets that you can do this, but we're not trying to finish it and let it come to us.

Speaker 8

Thank you. Thanks.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Florus VanDykem with Compass Point. Your line is open. Please go ahead.

Speaker 9

Thanks. Good morning, guys.

Speaker 3

Good morning.

Speaker 9

Good morning. By the way, John, I think your maybe it's just me, but your voice sounds a little muffled, maybe you're too close. I'm not sure what it is, but it seems to be a bad connection. I mean, it's probably just me, but question on your S and O pipeline. And obviously, as you project this forward, I mean, it's almost 5% of NOI, most of that's going to start to impact next year and in 'twenty six.

Speaker 9

I mean, it's pretty heady underlying growth. So I mean, if things work out, we should see an acceleration in underlying growth. Maybe if you can talk about the composition of that growth and how that's changing, particularly as you start to get into the later innings of your anchor box repositioning? How much more upside do you see on your shop space? And where do you think the greatest growth opportunity on the leasing side lies for that's still intact for KRG?

Speaker 3

Sure. Does that sound better? Can you hear me? Does that have to say it?

Speaker 9

It's still not as great. I apologize.

Speaker 3

Okay. I apologize too. Don't know what to say. Now we're moving microphones all over the place for us. So hopefully you can hear me.

Speaker 3

The bottom line is, I think the question is when I look out at the growth rates and where our same store has been and I think that when we look at where our occupancy gains are coming from, if you're looking at it like that, we clearly have more room to run-in the small shops. The acres are becoming close to where we were pre COVID. So I think that we when you combine the lease up efforts that you've seen us do over the last couple of years and you look at the growth that we're able to get in the shops and it's 50% of our revenue, I think I would point that there's real upside there. I also think if you look at the point that we made that our same store and you look at the sign not open rents versus our existing rents and the spread there that's really encouraging. And then also just the implied cash flow growth that we're able to generate as we have a better cruising speed as you said.

Speaker 3

So overall, I think it's a combination of those 2, but I hope that helps what you're looking for.

Speaker 10

Yes. Plus also, the nice thing is that it's that will be split between the emperors and shops. So we're not seeing pockets of demand, we're seeing broad based demand. And as John mentioned, that $26 in abundant ADR that's over $37 in the shops and plus the $18 on the anchors. Those are

Speaker 3

really, really strong wins.

Speaker 10

And again, that just evicted the continued strong demand on the leasing front.

Speaker 3

And then one other way to add is we have

Speaker 9

Thanks, guys. Maybe my follow-up and this is related more to capital allocation, but obviously your bigger assets have grown, particularly if you look at Southlake having grown NOI 50% over the past 3 years, bigger assets tend to grow at higher rates. As you think about deploying capital and other real estate, is that one of the key things that you consider when you're making investment decisions? You

Speaker 3

know, Forrest, I said that it's so specific to each individual asset. Obviously, if you're deploying more capital on a pro rata basis and you have the growth opportunity, it's going to move the needle more than a smaller deal. That being said, it really comes down to the individual quality of the asset. And Southlake, as an example, was an asset that was kind of it was perfect timing in order in the sense of the merger and kind of applying our leasing machine and being able to get those results and we're seeing the same thing at 1 loud and some guests. I would say that the bigger assets are intriguing in that way, But by the same token, we're really focused on the quality of the real estate and there's several large assets that we've looked at recently that we passed on based on the fact that we felt like the quality of the real estate in the long run wasn't going to support that growth.

Speaker 3

I mean, you can get short term growth, but we're really looking to get long term growth.

Speaker 10

Thanks, John.

Speaker 3

Thank you.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Craig Mailman with Citi. Your line is open. Please go ahead.

Speaker 8

Hey, guys. Keith, you had mentioned bad debt came in a little bit better than you expected. As you guys look out though over the next couple of months, I know The Container Store is being mentioned in the news now. They're not they're less than 1% of AVR for you guys. But like how are you thinking about Tenet Credit broadly, maybe for them specifically, over the next couple of months?

Speaker 3

Yes. So as we're looking out through

Speaker 10

the course of 20,026, nothing right now, Craig, is giving us pause or wanting us to sort of separate and have a separate reserve for a particular tenant.

Speaker 3

We get comfortable now as we

Speaker 10

go into next year that we're going to be able to manage any kind of fallout with

Speaker 3

a general bad debt profit. As it relates to container still in the assets, it's 7 locations. It's in basis points a day. And even following it,

Speaker 10

you'll see that they had a bit

Speaker 3

of a bit in their stock yesterday.

Speaker 10

They took some accounting notes, they had maybe exposure.

Speaker 3

But conversely, they've also had a $40,000,000 investment from the folks at Beyond. So there's good things happening there.

Speaker 10

I mean, the debt extended, the

Speaker 3

debt of this sponsor, the amount of debt

Speaker 10

that they actually went a huge amount of debt of something like $125,000,000 coming due in 2026. So as we think data on business and the brand is something that's going to survive. So we feel that the container still continue to do business. But this business, the business is at 7 spots in say about that, 3rd state.

Speaker 3

And if we have to, we will release it. So again, we feel

Speaker 10

good about that. We think that's an unknown business. But of course, we monitor and watch them best.

Speaker 8

That's helpful. And I don't want to belabor the point on acquisitions here, but just maybe how you guys are thinking, you clearly have more runway in the near term with the snow pipeline and the premium returns you're getting on that capital that's invested. But as you get through that, right, assuming your equity continues to trade where it is today, you will have the benefit of the higher cash flow as the leases commence. But you guys are at a lower leverage point. You've talked about potentially ramping that a bit.

Speaker 8

How do you think about if, say, the stock is still trading around this area in a year or 2, right? You have a huge spread relative to debt. How comfortable are you or how high from a leverage perspective would you be willing to go to kind of grow the portfolio accretively, even if cap rates are still inside of where the equity is trading? Or is that just a scenario where you guys are less interested in growing overall?

Speaker 3

Well, let me start with that. I think the bottom line is, yes, we're very aware of where our total cost of capital is. And we are aware that the equity isn't where it should be. That being said, we've been extremely prudent and quite frankly have done a great job in terms of what we've done in the bond market. So I think we're in a good position, Craig, to kind of see where this plays out.

Speaker 3

We're still in that leasing mode. I mean we've talked a lot about the accomplishments. That's great. We still have more leases in front of us that generate high returns on capital. And so that continues to be the highest return on capital.

Speaker 3

As we move into late next year into 2026 and as that starts to kind of absorb, then I think we're in a position and we're generating even more free cash flow in 2026 and 2027 that all this will come together and we're going to make some decisions around more treasury decisions, where are we investing those dollars. And to your question specifically, can we increase leverage? We can absolutely increase leverage. And frankly, if we went to 5.5%, we'd still be low relative to the peers and we're at 4.9%. So I mean there's real movement there.

Speaker 3

And what we would want to do is if we were to increase leverage at all, we want it to be very accretive obviously. And I think that will come to us. So I think we're in a great position actually as the market continues to improve, as lease up continues to happen and the supply demand characteristics are working in our

Speaker 10

favor, which I think at this point looks like it will continue into next year.

Speaker 3

So we'll just be really selective and make very good capital allocation decisions. And that's our primary job is making smart capital allocation decisions. And we'll do that and we'll do it accretively. I'll just add, Craig, that kind of putting it in perspective,

Speaker 10

we could acquire somewhere between $500,000,000 $600,000,000 of assets, take a cap

Speaker 3

rate and remain at 5.5 times, which is

Speaker 10

within our long term target. And we think about it, we're doing that

Speaker 3

with debt. So when we think about the cap rates,

Speaker 10

we're very sort of services and uses driven. And in the context of what's headed in the average cost of capital, again, it may not make sense. A lot of it based on our tax of debt, we just issued a bond of 4.95%. It allows us to look at assets and use it out there to begin to diversify it and do something accretive and still maintain the kind of quality that we want to maintain.

Operator

All right. Thank you. And we'll move on to our next question. And our next question is going to come from the line of Andrew Rollie with Bank of America. Your line is open.

Operator

Please go ahead.

Speaker 6

Hi, good morning everyone. Thanks for taking our questions. Just on the Parkside acquisition, could you speak to the cap rate on that deal and the degree of compression after you lock that up? And your messaging continues to be that internal deployment is your best use of capital, but just curious if this latest transaction might signal a

Speaker 8

shift into more external opportunities?

Speaker 3

Yes, sure. In terms of the cap rate, we didn't give a specific cap rate. I mean, what we did say is that it was accretive to the asset that we sold in Chicago. And I would tell you that the cap rate that we were able to acquire it at is probably 50 basis points to 75 basis points higher than it would be today based on the timing and the length of time it took to for the seller to be in a position to close the deal. So it was a great deal for us.

Speaker 3

In terms of cap rates overall, my commentary there would be that they are compressed versus where they were 3, 4, 5 months ago. And it's significant today and the type of assets that we own and the quality of assets that we own generally trades in the kind of mid-5s to low-6s. I mean that continues to be the market, which is why we point that out as it relates to the acuity value of our stock price today. What was the second part of your question? I'm sorry.

Speaker 6

Just more broadly, I mean your messaging, it's still that internal deployment is your best use of capital, but just curious if that transaction is signaling a shift into a wider array of external opportunities?

Speaker 3

Right now, I think we do continue to be maintaining that desire to grow internally internally because of very high returns on capital. And also the overall environment is aggressive right now in terms of us trying to be able to find accretive opportunities. That being said, the point we're really trying to make today is that we have such a strong balance sheet that we can move into that at a time that we choose to. And I think as things continue to if they move the way we think they're going to move, certainly in the next couple of quarters, that will be an opportunity for us to look to grow. I'll just add, I think

Speaker 10

Dan mentioned something to Matt said.

Speaker 3

At this point, we've seen the light

Speaker 10

of them in the tunnel and

Speaker 3

they all did it decent. We're really starting to think about what's our standard levels

Speaker 10

that we're going to pull. John talked about activating Long Loudon and talking to you about kind of capacity to do acquisitions. So we're absolutely focused on what's happening after this new update is over.

Speaker 3

And that's going to be the main theme that Roland is going to

Speaker 10

be discussing in Allstate. So hopefully you can mute it and we'll have some more details on

Speaker 3

it.

Speaker 6

Okay. And just a second question for me. Just curious what percentage of your 2025 leasing needs have been addressed at this point? And how does that compare to this time last year? And also how far into the future are leases being signed for commencement beyond 2025?

Speaker 10

I would say about 50% of

Speaker 3

our leasing needs for 2025 have been addressed. Which compares very directly with last year.

Speaker 10

So I think we're on big, attractive number of demand continues to be elevated. And was it 55%? Yes. I think it was

Speaker 11

the timing on how leases are signed for delivery. So I think the answer to that is we are working on leases right now that could deliver in 2026. So these periods can go out as much as 1 year just from a negotiation standpoint.

Operator

Thank you. And we'll move on to our next question. And our next question comes from the line of Daniel Peppero with Green Street. Your line is open. Please go ahead.

Speaker 8

Good morning. Thanks for taking my question. You mentioned that you are focused on long term growth instead of just short term growth in your portfolio. In your experience, what would you say are key variables that you look for as predictors of high long term growth in a property, whether it be demographics or anything specific to the property?

Speaker 2

Yes. I think for sure, it's

Speaker 3

the 1st of all, it's

Speaker 2

the underlying quality of the real estate. Then it comes down to the merchandising mix, the type of shopping center that it is, whether it's a lifestyle center or a grocery anchored center or a community center, how much access we have to rents rolling over in the next 3 to 5 years, and whether or not those rollovers have options associated with them and are those options at a specific number, are they fair market value? There's a lot of things that we look at as it relates to the ability to generate above average embedded growth. And part of that is just how we go about doing the business. And that's why we made the comments about where we are this year versus last year, up 50 basis points in our embedded rents in the small shop portfolio as an example.

Speaker 2

And if you look out over the last couple of years, it's a huge increase what we've been able to get in embedded growth. So I think there's a good balance between our operating platform, which we think is one of the very best in the space. And I think if you look at our margins and you look at our recovery ratio and you look at our G and A to revenue, you look at real operating metrics, you'll see that we're one of the best, if not the. And then it just comes down to the real estate. Can we impact the real estate?

Speaker 2

So I think there's a it's the fun part of the business. We're very good at it and we'll continue to look for those opportunities to find deals that we can push the growth.

Speaker 8

Got it. Thank you.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Dorey Kestin with Wells Fargo Securities. Your line is open. Please go ahead.

Speaker 12

Thanks. Good morning. Is there any update you can provide on the process around the asset that you have held for sale? I guess, are you finding that it's also rather competitive? And would you expect to close within the year?

Speaker 4

Absolutely expect to close within the year and the asset is supposed to hit the market I think today or early next week. So it's imminent and again we're very confident we'll be able to transact within the 1 year time period.

Speaker 2

Yes, not within this year, within a year.

Speaker 4

Not within a year, right? Within 12 months.

Speaker 12

Got it. And then the percentage of small shop new leases renewals at over about 4% with the rent bumps. They continue to rise quarterly and it's pretty impressive. I think you're over about 70% for the year. Are you finding that you're going to that you have to give in other areas of the contract to achieve that or is the leasing environment purely supportive of that growth in your markets?

Speaker 2

No, not at all, Dory. We are in fact, we believe that we've improved our leases in terms of things that we've that always what's the right word negotiate with our customers, our partners. And I think that the environment's even gotten better as it relates to that. So we're not actually foregoing anything in terms of the lease terms as it relates to what we're able to do in our embedded rent growth. And as you know, we've been very vocal around how important that is to our platform.

Speaker 2

And certainly, we believe that we've been the leader in our ability to generate internal embedded rent growth in the small shop business. And now we're obviously focused as well on the anchor side of the business, which as you know is harder, but we're making progress. And as supply and demand continue to move in our favor, it's only logical that that would get better. And I think that with the overall environment for retailers still being very strong, we should think that this can get better and continue. Tom, you want to add to that?

Speaker 11

Yes. Only thing I would say is be assured that our real estate team is not focused just on growth. It's one of their most important components as they come into real estate committee, but we care just as much about exclusives about fixed cam language, about making sure we have long term flexibility in terms of surrounding areas around the entire parcel. So we focus a lot of attention on that because those are the ones that from a long term perspective can create problems for the company. So our team does a great job of hitting growth and all the ancillary components with inside the document.

Speaker 13

Okay. Thank you. Thanks.

Operator

Thank you. And one moment for our next question. Our next question is going to be from the line of Michael Mueller with JPMorgan. Your line is open. Please go ahead.

Speaker 8

Thanks. Just going back to the release when you talked about allocating more capital, retained cash flow to select developments. Was that comment just focused on the future Loudoun opportunities or mixed use in general? And are there any projects that you're considering that are kind of really retail driven and not mixed use?

Speaker 2

Well, in terms of the comment, it wasn't it was not just specific to One Loud and I think what we were trying to say, Michael, is that, as we're getting into the later stages of our lease up of our existing platform that cash flow can obviously increase over that period of time and we can deploy free cash flow into development and redevelopment at very good yields on a risk adjusted basis. That's always the goal. And redevelopment, obviously, we believe that the risk adjusted yields are probably going to be better. But ground up, as it relates to adding on to existing centers or even adjacent land to an existing center can make a lot of sense. So I think we do believe that we can pivot into that direction and do it without doing any harm at all to the balance sheet.

Speaker 2

So as we move forward, I think that that's important. As it relates to retail specifically versus mixed use, again, that comes down to the product itself. I mean, we recently delivered a retail only development in Florida that was on a parcel of ground adjacent to a large center that we own in Port St. Lucie as an example. That was a small grocery anchored center anchored by Fresh Market and they're doing extremely well.

Speaker 2

It's a good sign that we can find those opportunities. And as we generate more and more free cash flow, this is just going to be a really nice opportunity for us to drive value.

Speaker 3

Got it. Okay. Thank you. Thank you.

Operator

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Alex Feigen with Baird. Your line is open. Please go ahead.

Speaker 8

Hi. Thanks for taking my question. First one for me is which retail categories are being the most aggressive for new space in your centers?

Speaker 2

Tom, do you want to add that?

Speaker 11

One of the categories we've had tremendous success with as of late and we just took a trip out west to work on this further is on the grocery side, we are finding many opportunities with some of the best names in our space and that spans about 3 or 4 different category users. So we've been extremely happy with that. We have continued we've continued to do very strong in your basic core box components, the Total Wines, the Dick's, the Ross, recent deal with L. L. Bean, HomeGoods, Trader Joe's.

Speaker 11

So we feel like we've had an extremely successful approach in terms of diversifying the base while increasing the credit quality and that's been one of the top priorities as we've moved to lease up this portfolio. But I think the word all in all is just tremendous diversity of use with strong credit.

Speaker 2

Yes. The only thing I would add to that is one of the benefits of the strength of our portfolio and the diversity of our asset base in our portfolio is that we're we have strong relationships with customers that span all types of retail. And I would tell you that the pool is deeper than I've ever seen it in our really in the history of this business and our ability to do transactions with everything from luxury retailers to service retailers. So OpenAir is definitely positioned very well over the next several years to take more and more market share and we're going to be a part of that.

Speaker 8

Helpful. And for a second one, it looks like the total portfolio composition is about 47% to 53% anchor versus shop. As the portfolio gets fully leased, what do you expect that breakdown to be moving forward?

Speaker 2

Well, assuming the portfolio doesn't change a lot, it won't change much. I mean, we're generally going to be kind of in that fifty-fifty range plus or minus. Remember, we also have almost 10%, a little less than 10% actually of our revenue is ground leases. So that skews that number out a little bit. But bottom line, I think this composition is a really good composition because it balances both ends of the spectrum in terms of growth and stability.

Speaker 2

Right now everybody is focused on growth. There are certain times where stability is more important. And that's why we own lifestyle, we own mixed use, we own grocery, we own neighborhood, we own community centers and a little bit of power. You put that all together, it's a pretty good portfolio.

Speaker 8

Got it. Thank you. That's it for me.

Speaker 3

Thanks. Thanks.

Operator

Thank you. One moment for our next question. Our next question is going to come from the line of Brendon Cutler with Jefferies. Your line is open. Please go ahead.

Speaker 13

Hi, it's Linda. Regarding Container Store, I know 2 are in your highest quality locations, 1 Loudoun and Southlake. You think these will lease up faster than the other 5? And then what do mark to market rents look like overall?

Speaker 2

Hey, Linda, it's John. First of all, I think as Heath pointed out, it's not just those couple that you mentioned. I mean, they're generally speaking, Container Store historically was a tenant that was pursued quite aggressively in high quality properties. They generally are not in a property that wouldn't be viewed as very high quality. So I think all 7 of them are positioned very well.

Speaker 2

We're not at the stage where we're looking at mark to market based on the fact that what Heath walked you through that we think that at this point in time there's nothing that would indicate that things are radically going to change in the near term. That being said, there's lots of optionality on these particular boxes based on the real estate they're in and also the size. We could split these boxes, we could lease them to one particular user. The market still remains really strong. We hope we're not doing that.

Speaker 2

We hope that we just continue as is, but we're very confident that it would be very productive to get the space back.

Speaker 13

Thanks. And then in terms of your strong mark to market cash spreads and higher contractual rent bumps, would you consider providing GAAP spreads in your disclosures going forward?

Speaker 9

It's kind of funny you asked

Speaker 4

that Linda last. We used to provide GAAP spreads and have it, but something that we're that's under consideration, so stay tuned. But needless to say, the GAAP numbers, especially when we're embedding 4% bumps on the shop side, would be much higher than our cash spreads.

Speaker 2

Yes. I mean, my personal thought there is, it's just now we have another metric out there that everybody doesn't report in the exact same way. But bottom line is, our cash spreads, Linda, are very strong and that represents the business GAAP. Obviously, we certainly can talk about what our GAAP spreads are, but they're a lot higher. Now whether that matters, I don't know.

Speaker 13

Probably does. Thanks.

Speaker 4

Thank you. Thanks, Linda.

Operator

Thank you. I would now like to hand the conference back over to John Tite, Chairman and CEO for any further or closing remarks.

Speaker 3

Well, again, I just want to

Speaker 2

thank everybody for joining us. Really appreciate your interest in the company. And we look hopefully look forward to seeing a lot of you in Las Vegas at our final installment of 4 in 24. Thank you.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.

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Earnings Conference Call
Kite Realty Group Trust Q3 2024
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