Kite Realty Group Trust (NYSE:KRG) Q3 2023 Earnings Call Transcript

Kite Realty Group Trust (NYSE:KRG) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2023 Kite Realty Group Trust Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to the Senior Vice President of Corporate Marketing and Communications, Mr. Bryan McCarthy.

Bryan McCarthy: Thank you, and good afternoon everyone. Welcome to Kite Realty Group's third quarter earnings call. Some of today's comments contain forward-looking statements, that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the Company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for reconciliation of these 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.

An exterior view of an upscale building in a busy urban area, showcasing the company's real estate investments.

I will now turn the call over to John.

John Kite: Thanks, Bryan, and thanks everyone for joining us today. KRG demonstrated another quarter of exceptional execution across our best-in-class operating platform. Since the outset of project focus in late 2018, we have strategically positioned our portfolio and balance sheet to thrive in any environment. As a result of our operational intensity, we've outpaced our peers in three key metrics: ABR growth, blended cash spreads, and FFO growth. Regardless of how the next few years unfold, KRG is in the enviable position of moving forward with confidence. Turning to our third quarter results, we generated FFO per share of $0.51. Our same-property NOI grew by 4.7% as compared to the same period in 2022, primarily driven by minimum rent growth, lower levels of bad debt, and overage rent.

Our outperformance year-to-date is allowing us to increase our NAREIT FFO guidance by $0.03 at the midpoint. We're also increasing our same property NOI growth assumption by 100 basis points, moving from 3.5% to 4.5% at the midpoint. Heath will give more details around the quarterly results and our updated guidance. During the third quarter, KRG signed 214 leases, representing approximately 1.4 million square feet, producing 14.2% blended cash spreads on comparable new and renewal leases. Notably, our non-option renewal spreads for the quarter were 17.8%. This is an incredibly strong number for deals that require minimal capital. More importantly, KRG earned a 30% return on capital for all new leases for the trailing 12-month period. In addition to the strong leasing, volume spreads, and return on capital, we've been successful in achieving higher fixed rent bumps and CPI protection.

Through the first three quarters of 2023, 82% of our new and non-option renewal leases have fixed annual rent bumps that are greater than or equal to 3% and 41% of those leases includes CPI protection. The average annual fixed rent increases for the new and non-option renewals year-to-date was 2.5% for both our small shop and anchor tenants, which is a 100 basis points higher than our portfolio average. Redefining our long-term embedded growth profile remains a top priority. Last quarter we noted our plan to leverage our robust leasing demand by being more proactive in recapturing small shop space. The initiative has been very successful, as evidenced by the 80 basis point sequential increase in our small shop lease rate. Small shop demand has been very diverse and in the past quarter, we signed deals with restaurants, medical users, health and beauty, and fitness concepts.

On the anchor front, our lease rate took a predictable step backward due to the Bed Bath & Beyond situation. But we could not be more pleased with a flurry of activity on our empty boxes. This past quarter, we signed a total of five box deals at 53% comparable cash spreads. To date, we've addressed five of the Bed Bath boxes with an additional eight leases in negotiation, seven in LOI negotiation. I am confident we should have the vast majority of our Bed Bath exposure addressed by our next earnings call. What's even more impressive is the variety of anchor tenants we're partnering with, including grocery, big box wine and spirits, home furnishings, sporting goods, and discount retailers among others. For the next 18 months to 24 months, our best opportunity is to drive value simple, lease space, and commence rent.

KRG has a significant organic growth opportunity at a time when open-air retailers are experiencing favorable tailwinds. While our top priority is leasing, we've been consistent in our match funding transaction strategy to further improve the portfolio and minimize earnings dilution, while keeping our rock-solid balance sheet intact. Our transaction activity year-to-date has been a perfect example. We sold four assets, bought an asset, and used excess proceeds from the dispositions to pay down debt. We recently sold Reisterstown Plaza in the Baltimore MSA and Eastside in the Dallas MSA. We determined the downside risk at each asset eclipsed our ability to drive above-average returns. Conversely, we acquired Prestonwood Place in Addison, Texas, an affluent highly desirable suburb of Dallas.

The assets existing tenancy shows demand for the property is strong but will further upgrade the merchandising mix and drive operational efficiencies. Prestonwood Place instantly enhances the quality of our already dominant Dallas footprint. We will be showcasing several of our assets to the investment community next year with our 4 and 24 series. We look forward to seeing many of you at our first event in February in Naples, Florida. I started the call discussing the transformation KRG has made over the past five years. We've always been a team with unparalleled operational acumen and pride in ourselves being a real estate first organization. Now we've implemented a best-in-class operating platform onto an expanded high-quality portfolio while possessing one of the best balance sheets in the sector.

Thank you to our team for its continued dedication and commitment. And now I'll turn the call to Heath.

Heath Fear: Good afternoon. In this industry, we are fond of saying good things happen to good real estate. With that in mind, I'm pleased to report that KRG team has produced another spectacular quarter. For Q3, KRG earned $0.51 of NAREIT FFO per share based on same property NOI growth of 4.7% on a year-over-year basis. The quarterly same property outperformance was driven by a 240 basis point increase in minimum rent, a 30 basis point increase in net recoveries, a 160 basis point increase due to lower bad debt, and a 40 basis point increase in overage rent and other revenue. Year-to-date KRG has earned a $1.54 of NAREIT FFO per share and increased same-property NOI by 5.5% on a year-over-year basis. The components of our year-to-date outperformance closely track the quarterly themes.

We are raising our NAREIT FFO guidance to a range of $1.99 to $2.03 per share, representing a $0.03 increase at the midpoint. $0.025 is attributable to same-property NOI outperformance, while the other half penny is related to noncash front associated with rejection of certain Bed Bath & Beyond leases. At the midpoint, our updated full-year guidance assumes bad debt of 45 basis points of total revenues for the full year of 2023. No additional termination fees and no further transactional activity. We continue to operate the business from a position of strength, in large part based on our balance sheet. I'm pleased to report that S&P has upgraded our rating outlook to positive from stable. And we are optimistic that this will result in a full upgrade to BBB rating in the next 12 months to 18 months.

We've come a long way in five years, and we are uncompromising in our commitment to maintaining a balance sheet that affords us a disproportionate amount of security and optionality. We continue to remain opportunistic as it relates to the unsecured bond market, while our abundance of liquidity affords a patient posture as we contemplate our 2024 maturities. KRG is a dedicated and committed organization anchored in an efficient operating platform and a strong balance sheet. I'm proud of the progress we've made, and I'm excited for what the future holds. Thank you for joining the call today. Operator, this concludes our prepared remarks, please open the line for questions.

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