Kite Realty Group Trust

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 Kite Realty Group Trust Earnings Conference Call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one. I'd now like to hand the conference over to your host today, Mr. Brian McCarthy, Senior Vice President, Marketing and Communications. Please go ahead.

Thank you, and good morning, everyone. 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. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 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 Keith Feer, Senior Vice President and Chief Accounting Officer, Dave Buell, and Senior Vice President, Capital Markets and Investor Relations, Jason Colton. I will now turn the call over to John.

Thanks, Brian, and good morning, everyone, and thanks for joining us today. Well, we appreciate that this continues to be a challenging time for all of us, including our investors, tenants, customers, vendors, and employees. but we obviously hope this call finds you doing very well. Last quarter, we discussed how we seem to be closer to the end of the pandemic than the beginning. As we pass the one year mark of the first reported case in the US, we're more confident in that statement today. Currently, new cases are falling while the vaccination rate is growing quickly. There's a sense of hope in the country that we didn't have nine, six, or even a few months ago. The sense of hope makes us believe that we're on the cusp of the country returning to a more normal life. We continue to have very strong industry leading collections. Fourth quarter collections are 95% of gross rent. As we discussed last quarter, this is a testament to our properties, our people, and our processes. Even our third quarter collections continue to clip higher and now sit at 93% of gross rent build. While we will never stop pursuing the owed rent, we believe the stabilization and rent collection, quarter over quarter, shows the worst is behind us. With that perspective, let's discuss our strategy going forward in a more normal environment. The first part of our strategy is to continue to focus on warmer and cheaper parts of the country. The pandemic accelerated a migration to these cities and states that had already been underway. Technology improved the ability to more effectively work from home. Companies then realized they didn't need to be in major expensive hubs to attract talent. This accelerated large company moves to cities such as Dallas, Orlando, and Nashville, to name a few. The growth will be dramatic, and KRG will continue to position itself to benefit from that growth. This migration is far from over, and the advantage it presents is becoming more evident. The shift to warmer, cheaper locales is a key reason we purchased Eastgate Crossing in Chapel Hill, North Carolina. It's a premier asset anchored by Trader Joe's located in a KRG target market. Please note that we executed a non-disclosure agreement on the transaction. Therefore, we'll be unable to discuss details. What I can say is the transaction was a win-win for both sides. and we are very happy to be the new owners with plans to quickly increase the property's value. The second part of our go-forward strategy is leasing and filling the vacancy caused by the pandemic. We are already well underway, and the momentum of last quarter has continued. KRG executed 60 leases for over half a million square feet in the fourth quarter. Additionally, we are in the process of addressing over 80 percent of the 5.9% of ABR from bankrupt tenants. As a reminder, this is up from 65% last quarter, despite additional bankruptcies in the fourth quarter raising the impact, impacted ABR from 5.4 to 5.9%. We currently have 19 vacant anchor spaces, and during our big box surge a few years ago, KRG successfully backfilled 22 vacant anchors at accretive returns. We're hopeful to do the same with these vacancies. Our new project, Anchor Acceleration, is already well underway, and we've laid out the potential economics on page 19 of our investor presentation. You'll see that assuming the current ABR for our in-place anchors, there's a potential mark to market of nearly 30%. To provide a specific example, we had seven Steinmart locations become vacant this quarter. and over half of our year-over-year 490 basis point lease rate decline is from Steinmart, whose average ABR at those locations was only $8.16. If we had to pick an anger to lose, this was definitely the one. This temporary dislocation provides a great opportunity to backfill with a tenant who will not only pay market rent, but will drive significantly more customer traffic. As we examine new lease opportunities, please keep in mind that we're very cognizant of total return. We're not going to spend unnecessary capital simply to inflate our lease spreads. We are going to do what makes the most financial sense for the company and our shareholders. Sometimes this means a negative spread deal in exchange for limited or zero tenant allowance. The situation occurred this quarter. We had two Fitness anchored tenants that declared bankruptcy in 2020, where he executed deals to backfill those two spaces with minimal tenant allowances, resulting in negative spreads but a significant return on costs. Excluding these two leases of over 100,000 square feet, our blended lease spreads would have been 13.4% on a gap basis and 6.8% on a cash basis. Moving to shop vacancy, we have approximately 182,000 square feet of shop space to lease in order to get back to our industry-leading shop lease rate of 92.5% from the end of 2019. Since we've been there before, we are confident in our ability to once again reach these levels. As with the anchors, we've laid out the potential economics in our investor presentations. The final part of our go-forward plan is to maintain a strong balance sheet in order to take advantage of new opportunities. One opportunity was the purchase of Eastgate. Another opportunity has been the redevelopment of the Macy's store at Glendale Town Center that began this quarter. In addition to the multifamily development we announced last quarter at Glendale, we are bringing Ross Dress for Less, Five Below, and Old Navy into the shopping center to replace part of the Macy's box. The highlight of the project is that due to a partnership with the City of Indianapolis in the form of a TIF bond, the net cost to us is only $3.9 million, resulting in a very compelling yield. This is another example of the KRG team adding value at great risk-adjusted returns. We'll continue to take advantage of the opportunities that present themselves while always maintaining the strength of our balance sheet and our liquidity profile. Before I turn it over to Heath, I want to again thank the entire KRG team. I really cannot express enough of my gratitude to the men and women of our team. The strength of our operations is just not possible without them. And we all look forward to shifting from surviving the pandemic to thriving in the future. I'll now turn the call to Heath to discuss the balance sheet and 2021 guidance.