Kite Realty Group Trust (NYSE:KRG) Q1 2024 Earnings Call Transcript

Kite Realty Group Trust (NYSE:KRG) Q1 2024 Earnings Call Transcript May 1, 2024

Kite Realty Group Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. Welcome to the first quarter 2024 Kite Realty Group Trust earnings conference call. At this time, all participants are in listen only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Bryan McCarthy, Senior Vice President at Corporate Development and Investor Relations. Please go ahead.

Bryan McCarthy: Thank you and good afternoon, everyone. Welcome to Kite Realty Group’s first quarter earnings call. Some of today’s comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties, 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.

I’ll now turn the call over to John.

John Kite: Thanks Bryan and thanks everybody for joining today. KRG has maintained our momentum into the first quarter of 2024, delivering exceptional execution across our platform and further strengthening our already best in class balance sheet. Heath will walk you through the details of our quarterly results and increase guidance. And I’ll focus on recent sector trends, our operating priorities, and the series of strategic, well-timed initiatives that have allowed KRG to earn the highest total return in the open-air retail space over the past five years. Open air retail has demonstrated strong fundamentals and rapidly accelerated recognition of its essential role in each community we serve. The reappreciation of open air’s critical role as the most convenient and profitable distribution channel has resulted in consistent demand across our portfolio from both our tenants and shoppers.

The renaissance of open-air retail is amplified in the Sunbelt, where our portfolio benefits from migration trends out of higher cost living — at a higher cost of living metros and to warmer lower tax states. The top 10 MSAs for population growth in 2023 account for over 30% of our revenue and include cities like Dallas, Houston, Atlanta, or Orlando, Tampa and Phoenix. On the operational front, we remain laser focused on creating the best experience possible at our centers by selectively adding high-quality tenants to our portfolio. Since the beginning of 2022, we’ve executed 53 anchor leases to 36 different brands, over 90% of which were national tenants, and we increased our grocery exposure by 400 basis points to nearly 80%. We’ve generated 46% comparable cash spreads and 26% returns on capital, and we’re very confident in our ability to continue the robust leasing efforts.

Our thoughtful approach prioritizing quality and value creation will continue to enhance the merchandising mix at our centers and improve the credit profile of our tenant base. On the small shop side, we continue to have success pushing higher embedded growth for new and non-option renewal shop leases signed in the first quarter of 2024. The average annual growth was 3.4%, and 70% of these leases had fixed rent bumps greater than or equal to 4%. To illustrate the tremendous progress we’ve made in 2022, the average annual growth was 2.7%, and only 3% of the leases had fixed rent bumps greater than or 4%. The benefit of negotiating higher fixed rent bumps will take time to materialize, but our efforts are on track to provide tangible improvements to our long-term embedded growth profile.

Maintaining a disciplined leasing approach by keeping quality and growth at the forefront will further strengthen our durable cash flow stream, while generating strong risk adjusted and absolute returns. Our sign not open pipeline increased to $32 million and we expect 76% of the NOI to commence in 2024. On pages six and seven of our latest investor deck, we detail the commencement timing of the of the sign not open pipeline and the compelling opportunity for investors based on current share price at various capitalization rates. These pages do not account for the future opportunity to allocate free cash flow, which we expect will significantly ramp up as our elevated leasing spend normalizes. Along with our increased free cash flow, we expect meaningful AFFO and dividend growth While the opportunity for investors is very compelling right now, we believe the future holds an even more convincing case for KRG with better growth and more capital to allocate.

Over the last five years, KRG has earned the highest total return in our sector. We were able to accomplish this by improving the quality and location of our portfolio, fortifying our balance sheet, executing on a transformational merger, improving our credit ratings and rerating our cost of debt. These very well-timed successes could not have dovetailed better with the open-air retail supply and demand imbalance, the acceleration of consumer trends spurred by the pandemic and the increased commitment to physical retail. Our continued execution has allowed us to raise the midpoint of our 2024 FFO guidance by $0.02 and our same property NOI growth assumption by 50 basis points. Our team has produced solid results and collectively we’ve positioned the company to continue outperforming.

We have an experienced group across all departments of the organization and I hope each of you will get to spend time with our various team members at our remaining four and 24 events in Dallas, Washington DC and Las Vegas. Thank you as always to our incredible team. And now I’ll turn the call to Heath.

Heath Fear: Thank you and good afternoon. Following John’s remarks about our four and 24 series, our initial event last February was very well received and showcased the strength of the Naples market, the underlying quality of our bread and butter assets and the intensity of our operating platform. We are anticipating a great turnout for our next event in Dallas, which is our largest market in terms of ABR and GLA. In Dallas we will tour over 5% of KRG’s total NOI, while demonstrating the prowess of our leasing team using Southlake Town Square as our case study. Southlake is one of the nation’s premier mixed-use lifestyle centers and we can’t wait to show you the tremendous progress we have made. Turning to our results for the first quarter of 2024, KRG earned $0.50 of NAREIT FFO per share, which was slightly higher than anticipated due to outperformance in same property NOI and an unbudgeted termination fee.

Same property NOI grew by 1.8%, bolstered by increases in minimum rent and lower bad debt as offset by a decrease in net recoveries, primarily due to the timing of recoverable operating expenses. Based on the first quarter outperformance and our revised outlook for the balance of the year we are increasing our 2024 FFO guidance by $0.02 at the midpoint to a range of $2.02 to $2.08. At the midpoint we assume a full-year bad debt assumption of 80 basis points of total revenues and a full-year same property NOI growth assumption of 2%. This represents a 20-basis point bad debt improvement and a 50-basis point improvement in same property NOI growth as compared to our original guidance. The improvement in the full-year bad debt component is a function of combining the actual bad debt we experienced in the first quarter, which was approximately 30 basis points of first quarter revenues with the continuing assumption of 100 basis points of bad debt, of total revenues for the remaining three quarters.

As we detailed last quarter, our same property growth for 2024 was adversely impacted by our disproportionate exposure to Bed Bath, the unexpected departure of a large feeder tenant and the extremely low bad debt we experienced in 2023. Absent these three items our same-store growth assumption for 2024 would be 3.5%. In terms of the trajectory for 2024, we expect same property NOI growth to accelerate in the back half of this year, providing a solid foundation for growth into 2025 and 2026. As always, our goal with giving guidance is to prudently set expectations while leaving room to outperform. With that in mind, our guidance does not include certain recurring, but unpredictable items including lease termination fees, land sale gains, or prior period collections unless and until the same are committed.

Following our well-timed bond issuance, Moody’s upgraded KRG to BA2 and Fitch revised our outlook to positive. Furthermore, we are optimistic that S&P’s positive outlook will mature into a full upgrade to BBB in the next few quarters. On page 14 of our investor presentation, we show the complete overhaul in our cost of debt relative to the BBB REIT index. As we continue to demonstrate our commitment to maintaining a strong balance sheet and show the same commitment to the unsecured debt market, we expect our debt pricing will continue to compress. As a reminder, we continue to hold the proceeds from our $350 million January bond offering in an investment account earning interest in excess of the yield on our 2024 maturities, which we intend to retire in late June and Mid-July, at 5.1 times net debt to EBTIDA, approximately $1.2 billion in available liquidity, a debt service coverage ratio over 5 times, and healthy operating fundamentals.

Our credit profile is one of the best in the sector. As highlighted on page seven of our investor debt, the current stock price of KRG represents an extremely compelling entry point. The recent private market transactions serve to solidify our current value proposition. We believe that the catalysts for a change in our equity multiple are clear in the form of outsized occupancy gains over the next two years. Strong pricing power, higher embedded growth, low leverage, improved cost of debt, and significant free cash flow in the outer years. Thank you all for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets.

Todd Thomas : Thanks. Good afternoon. First question, just around the guidance and last quarter specifically, you talked about the $0.02 drag from the theater vacated city center in White Plains. Looks like a lease may have been signed with a replacement tenant. I’m just curious if you can talk about that and provide some detail around the rent and perhaps timeline for rent to commence. Didn’t sound like there was anything factored in the, updated guidance as it pertains to that.

John Kite : Hey, Todd. You can assume that the guidance does take that into account, and that we’re not going to obviously get specific about an individual tenant’s rent, et cetera, but we can tell you that it’s an 80,000 square foot deal and it’s a tremendous opportunity for us to quickly backfill something that is not easy to do, and we’re really, we were focused on getting that done. The payback period for this deal is less than two years. It’s almost a 50% return on cost. So, it’s a fabulous deal. And suffice to say, the rent, the in-place rent is less than the previous tenant was paying. But there’s definitely a small pickup for the year. It’s probably less than half. It’s around a half a penny for the year. So, it’s really more about the fact that we were able to get a great operator in quickly and again to a difficult situation in terms of going into a vertical retail establishment. So, very happy with it. Tom, if you want to add anything.

Tom McGowan: Yes, the only thing I’d add, Todd, is one of the things that we really wanted to accomplish to protect that zone from an exhibitor standpoint was get them open as quickly as possible. They’re going to start doing some soft openings next week and then I think the week after we should be, we should be ready to go. So that was one of our big goals that we have achieved.

Todd Thomas: Okay. And the timeline for, is there a free rent period or any concessions or is rent scheduled to commence, relatively rent.

John Kite: Yeah. Rent will commence when they open, so no free rent.

Todd Thomas: Okay. Got it. And then, can you provide a, a little bit of additional detail on the lease termination fee in the quarter? Sounds like that was not previously anticipated. Can you just discuss that a little bit more and provide some additional color?

Heath Fear: Yes, Todd, very simple. It was just a bank branch that decided to close, and we did a healthy NPV in the remaining rent payments and they paid us the termination fees. So not something we’re expecting, but I’m happy to take that rent termination fee and go ahead and release that space. So, it was a win-win for us.

Todd Thomas: Okay. And then just lastly. Heath, you talked about the company’s leverage profile and credit metrics. And I wanted to ask about acquisitions again this quarter. It sounds like there’s a little bit more deal flow across the industry, just given where the balance sheet sits today and sort of the position that you’re in. Just wanted to get a sense of your appetite for investments and if you could discuss kind of price trends that you’re seeing in the market.

John Kite: Sure, Todd. Look, I think we continue to be very focused on the execution in our operating platform right now and a little less focused on external opportunities. Look, we’ve been very clear that in the next two years, we’re going to spend over $200 million in terms of TIs and LCs. Some people may call that redevelopment, but it’s leasing. And it’s great because the returns on capital are extremely high. Everything is very quantifiable in terms of the risk. So that is really our focus, and it will generate significant free cash flow for us once we complete that lease-up plan. So that doesn’t mean we aren’t looking at outside opportunities. We obviously are. We will continue to do some paired trades like we’ve talked about in the past, where we would sell some assets and then look to redeploy the capital into higher-growing, better positioned properties.

In terms of what we’re seeing in the market, the market is getting more activity, there’s liquidity. Look, open-air retail is a very sought-after asset class right now despite the fact that you look at our — where our stock trades, you wouldn’t think that. But in the private market, this is a very sought-after asset class and our properties are very sought after. So, it’s definitely compressed. It’s harder to find opportunities at yields that we want to even think about relative to the yields that we’re getting in our leasing platform. So, we will do some transactions. I would say that the high-quality stuff continues to trade in kind of the high 5 to low 7 area, depending on what it is and where it is. And so obviously, that’s quite disproportionate from where we trade in and from’s a stock price perspective.

Todd Thomas: Okay. Thank you.