Kite Realty Group Trust

Good day, ladies and gentlemen, and welcome to the third quarter 2021 Kite Realty Group Trust earnings conference call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. To ask a question, you will need to press star then one on your telephone. As a reminder, today's call is being recorded. If anyone should require operator assistance, please press star then zero. I would now like to turn the call over to your speaker today, Brian McCarthy, Senior Vice President of Marketing and Communications. Please go ahead.

Thank you, and good morning, 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 a 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 Heath 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. I wanted to thank you for joining us on our call today. Before I begin, I want to thank the multitude of people on both sides of the merger that worked tirelessly to ensure the successful combination of these two high-quality and complementary real estate platforms. For those of you that were with us before the transaction, Please know that if it wasn't for all of the remarkable things that we've accomplished together over the past several years, none of this would have been possible. For those of our new team members, welcome aboard. I've enjoyed getting to know many of you over the past several months, and I've consistently been impressed with your positive attitude and exceptional professionalism. We're so excited to have you join us as we embark on this new era of excellence. This merger has been transformative for all of us, yet our motto remains unchanged. We are one team with one focus. As we began to come out of the depths of the pandemic, we talked about how KRG was positioned to seize upon any opportunities that may present themselves. It was that very same posture that made the merger with RPAI possible, resulting in one of the largest open-air owners in the country. Yet, despite the unprecedented stress and dislocation caused by COVID, and despite the immense undertaking of completing the merger that impacted every single person at KRG, we were still able to produce a phenomenal quarter of results. It all goes back to our three Ps, properties, processes, and people. And we absolutely excel on all three fronts. The quality of our results also speaks volumes about the health of the retail environment, the long-term viability of open-air retail real estate, and the durability of our cash flows. Our properties serve not only as a last-mile fulfillment hub for retailers, but as an access point for consumers and communities. The demand for our great real estate is evident not only in traffic, which is up versus 2019, but also in the accelerated leasing volumes and resulting spreads. We signed approximately 585,000 square feet in the third quarter, including seven anchor leases, three of which were grocers. In the past two quarters, we've leased over 1.2 million square feet, which are unprecedented levels for our legacy portfolio. Blended lease spreads were 20% 0.7% and 13.4% on a gap in cash basis respectively. Our lease rate continues to rebound and is now at 92.8% for the portfolio. This 130 basis point increase from last quarter is another indication of the continuing recovery in our operational and financial performance. The outsized leasing volume continues to widen our total retail portfolio lease to occupied spread to 400 basis points, with current signed not open NOI of approximately $14 million. Together with the legacy RPI portfolio, we have signed not open NOI of approximately $33 million. If you turn to page three of our investor presentation, which highlights the potential growth from re-leasing and active development, You'll notice that the $33 million represents almost half of that total amount. Said another way, our stock is significantly undervalued. One of the drivers behind the widening lease to occupied spread is the success we are experiencing in our anchor acceleration program. We signed another five anchor leases this quarter for a cumulative total of 12 anchor leases since the program's inception. These 12 leases are expected to generate average cash yields of over 26%, with comparable spreads of 14% on a cash basis. While the program is far from over, I am very pleased with the progress we've made. The specific details of our executed and potential anchor leases are laid out on page 21 of our investor presentation. Let's turn to a topic I'm sure you're all focused on. The merger of RPAI and KRG is a great strategic match that lines up perfectly with many of the macro trends we're seeing impacting our industry. First, as is with everything at KRG, it's about the real estate. As you can see from our operating results, our top quality assets are benefiting from being in high growth, warmer, and cheaper markets. These low tax and business-friendly geographies continue to benefit from the highest population growths and corporate relocations. This merger more than doubled the GLA and ABR that KRG owns in those markets. We now have nearly 60 percent of our ABR in warmer and cheaper markets, 40 percent of which belongs in Texas and Florida alone. An added benefit of the merger is that establishing a significant presence in select strategic gateway markets The combined portfolio now has 26 percent of value in super zip neighborhoods, the second highest percentage in the sector. Additionally, our portfolio mix of predominantly grocery-anchored neighborhood and community centers are now complemented by vibrant mixed-use assets, thereby providing greater optionality to help serve both retailers and consumers. Many of these mixed-use and lifestyle assets have experiential components that were disproportionately impacted by COVID and now are seeing a significant resurgence in demand while customers re-embrace the live, work, and play environment. A final benefit I'd like to point out is that KRG is now a top five open-air shopping center REIT. The increased scale provides numerous operational and capital market benefits. On the operational side, we'll be better able to serve retailers by having a balanced variety of additional high-quality assets. We also believe the combined operations platform will lead to increased NOI margins across the portfolio. On the capital market side, KRG will become a serial issuer of public bonds that will lower our debt costs and improve our risk profile. Likewise, the larger equity market cap will make our stock more liquid and expand the universe of potential equity investors. In addition to the accretion from the merger, synergies will create a significant economic impact from the merger, and Heath will address those momentarily. That being said, we are just as excited about the value of our new entitled land. Our development philosophy has never been, nor will it ever be, a mandate. We evaluate each project based on the needs of the underlying real estate, the timing of the development cycle, and the resulting risk-adjusted returns. Given this mantra, there are times when we may decide it's better to wait or take on a partner to pursue alternatives. One example is The Corner. We entered into a 50-50 joint venture to develop 285 apartment units and 24,000 square feet of ground floor retail. In doing so, KRGs sold the land to the venture, will earn development fees, and is expected to contribute no additional capital. We will use this discipline to examine all of our real estate, including the newly acquired entitled land, and determine the best course of action for each opportunity to maximize shareholder value. No matter what the course of action we will take, we will always keep in mind our best-in-class balance sheet. As part of our due diligence, we had a third-party value each of the entitled land parcels. We believe the approximate value of this entitled land, as is, with no additional spend, is between $125 and $180 million. That represents a tremendous opportunity for KRG to showcase our capital allocation prowess. Regarding the integration of the merger, we are making excellent progress. We were able to hit the ground running on day one due to our pre-closed planning. We not only determined what the combined team would look like, but each business unit had multiple meetings and established both how to integrate the team, their systems, and how to operate going forward. No integration of two companies is flawless, but we are very pleased where we are today. This is a testament to our people. We are a premier open-air shopping center REIT, and I am proud of the progress our team has made. KRG remains committed to its primary focus of continuing to grow operating cash flows. The completed merger paired with a strong corridor of operational results is another step in the right direction. Thank you again to the KRG team for their hard work and dedication. I can't emphasize enough how excited I am about the processes, properties, and especially the people of KRG. I'll now turn the call over to Heath and provide more color on our quarterly results and balance sheets.

Thanks, John, and good morning, everyone. I want to echo John's gratitude for all the hard work that's gone into completing the transaction and the ongoing integration activities. We are confident that when the dust settles, KRG will have a best-in-class platform across every single business unit. I'd also like to welcome many of my former RPAI colleagues to the KRG team. We are looking forward to doing great things together. To say this transaction has been full circle for me is an understatement. Suffice to say that life works in mysterious ways. Turning to KRG's standalone third quarter results, we generated 25 cents of NAREIT FFO and 33 cents of FFO as adjusted. As a reminder, we were reporting 2021 FFO on an as-adjusted basis, so as to reduce the noise associated with 2020 receivables, 2020 bad debt, and the costs associated with the merger. As set forth on page 19 of our supplemental, the net 2022 collection impact in the third quarter was minimal, with the collection of $2.4 million of prior bad debt offset by $300,000 of accounts receivable we now deemed uncollectible. Our same property NOI growth for the third quarter is 10.8%, primarily driven by a reduction in bad debt as compared to the prior year period. This includes the benefit of approximately $2.1 million of previously written off bad debt that we collected in the third quarter. Excluding those amounts, our same store NOI growth would be 6%. It is also important to note that when evaluating our same-store results for 2021, keep in mind that KRG consistently achieved the highest levels of rent collections in 2020, thereby creating more challenging comparable periods. With respect to outstanding accounts receivable items, as of last Friday, the balance on our outstanding deferred rent stands at $1.7 million, as compared to $6.1 million as of December 31, 2020. Our small business loan program has been extremely successful, and not a single borrower under the program is delinquent or has defaulted. Our balance sheet and liquidity profile not only remain solid, but continue to improve. Our net debt to EBITDA was 6.1 times, down from 6.4 times last quarter. Pro forma for the merger, third quarter net debt to EBITDA is six times, along with roughly $1 billion of liquidity. Adding in $33 million of signed not open NOI for the combined portfolio, our net debt to EBITDA would be 5.6 times. We are in a great position to not only weather any storm, but to also take advantage of any opportunities that present themselves. We are also proud to announce our inaugural credit rating from Fitch Ratings of BBB with a stable outlook. We believe, along with our investment grade ratings from Moody's and S&P, that KRG is well positioned to establish itself as a serial public bond issuer. I know many of you are anxious to understand the full earnings accretion associated with the merger, and we are equally anxious to share with you the details behind our growing enthusiasm. However, in light of the fact that we just closed the merger last week and that we are in the middle of our budget season, Prudence dictates that we wait until we give our combined fourth quarter results and 2022 guidance early next year. What I can share is that with each day, our conviction regarding the merger grows exponentially. In the meantime, to help with your modeling, we can provide some additional detail regarding synergy savings. As a reminder, we estimated stabilized cash synergies of $27 to $29 million, and stabilized gap synergies of $34 to $36 million. As of today, we are still comfortable with that range. In fact, as of the closing, approximately 21 million of annualized gap savings have already been achieved. It is important to note that we anticipate realizing on the additional annualized 13 to 15 million of gap synergies over the next 12 to 18 months. We will provide updated detail with respect to the timing of the remaining synergies when we report our combined fourth quarter results and 2022 guidance. Finally, due to the timing of the closing of the merger and the challenge of determining correct guidance for a partial quarter, we are suspending our 2021 guidance. We are confident, based on performance to date, that KRG's standalone 2021 results are on track to outperform our last published guidance. I will further share that based on our initial review of the preliminary operating results for RPAI in the third quarter, it would be safe to assume that they were also on track to outperform their last published guidance. We look forward to reporting combined fourth quarter results and issuing 2022 guidance in February. Thank you for everyone for joining the call. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. To ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. Again, that is star then 1 if you would like to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Todd Thomas with KeyBank Capital Markets. Your line is open.

Hi, thanks. Good morning. First question, just about development. You acquired RPAI's development in process and future pipeline with projects that are in various stages. Are you comfortable today with an almost $300 million pipeline or are some of those projects not necessarily long-term holds where you may look to potentially monetize some portions or properties from that pipeline.

Pardon me, speakers, is your line on mute?

Can you hear me? I just asked the question. I'm on the line.

Yes, Mr. Thomas, I can hear you.

All right, great. Todd, did you hear me? No, didn't hear you, but I had some... static for a little while.

All right, let's start over. Can you hear me now?

Okay, I can hear you now. Yep, John, I got you.

I heard your question. I'm going to start over, but I'm going to shorten the answer. It was an awesome answer, by the way. Yeah, look, macro, Todd, it's, you know, the remain to spend is 121 million of the 300 you mentioned. You know, so that's a very, very manageable number for us. We've analyzed each of the projects that are ongoing, of which a few of those are ours as well, and we're very comfortable with the risk-adjusted returns. You know, I think what we're referring to in the script was that we also have a significant value in the entitled land bank, and that's something that we're going to go through case by case, deal by deal. So, you know, there's great opportunities there, but we'll be extremely – diligent in the way we analyze how to move forward on that. So hopefully you heard most of that answer.

Okay, yeah, that's helpful. And then I'm curious if you could talk about rent spread. So third straight quarter with new lease spreads north of 30%. Can you comment at all on rent spreads as you move forward from here? And can you also talk about CapEx trends? And when you look at the RPAI portfolio with regard to CapEx trends, do you feel that the mix of assets that you acquired have a different capex profile than the standalone kite company?

Well, look, I think let's back up and start with us. You know, we've had obviously two good quarters in a row of spreads, but equally important, we've had really strong returns on capital, which you can see in our investor presentation where we lay that out relative to our anchor acceleration program. So, yeah, I mean, I feel very good about that momentum. And, you know, it continues as we lease up, you know, as we lease up the portfolio. I mean, obviously when you have the impact that we had from COVID, you have a, you know, and when we get going, the runway is pretty positive and we've been probably outperforming as it relates to spreads. In terms of the combined portfolio, you know, it really comes down to the mixture of deals that get done in any one quarter, Todd. And, you know, whether that be a combination of new leases or renewals, So that has a lot to do with certainly the CapEx side. For example, for us, you know, in this quarter, there was quite a bit more in the way of anchor leases than there was in the previous quarter, so the CapEx went up, and that reflects that. If you look at our anchor acceleration program, I mean, we're still at $50 a square foot for the 12 deals that we've done in terms of CapEx. That's really strong. So we're very happy with that. That's why we're continuing to generate good yields and spreads. So overall, it feels like that shouldn't be tremendously different. But obviously, certain deals are more expensive than others, and it's going to depend on the timing in the quarter. Tom, you want to add to that?

Yeah, I would say in particular on grocery stores, we were able to do three stores this quarter, and we've done a total of four this year. So you're going to have higher costs both on the landlord work and the TI because it's more of a turnkey perspective. But our numbers still remain very modest across the board. As John said, each deal will have its own integral negotiations. But we don't see there being a significant change from where we are today to where we would be in the combined portfolio.

Okay, that's helpful. And then just the last question for Heath, you know, appreciate the commentary on the synergies from the merger. And I believe that the gap synergies include non-cash comp. But outside of the synergies, will there be additional rent and debt marks that will also have an impact on FFO and Do you have any sense what those might be or what the timeline to disclose those might be?

Yeah, Todd, so that's actually in process right now, and we'll disclose those impacts on our fourth quarter earnings call when we give our 2022 guidance.

Okay. All right. Thank you. Thanks. Thanks.

Our next question comes from a line of Flores Van Ditchcom with Compass Point. Your line is open.

Morning, guys. Thanks for taking my question. I wanted to maybe give some comments. Obviously, you're looking at the stock price performance, and there's been a lot of turnover, presumably, in the shareholder basis of both companies as you merge. But maybe just comment a little bit on the private market values and why – why KRG, you know, would appear to be attractive in your view?

Sure, Floris. Yeah, I mean, look, I mean, yeah, we certainly pay attention to the stock price, but we also understand that, you know, we're creating long-term value here. So it's a process and we're making excellent progress. And I think it'll be reflected in the stock as people see that progress. You know, it's kind of why I mentioned in my prepared remarks to really look at that investor presentation on page three. And, you know, before I get to the private market, I want to talk a little bit about what we're doing internally. I mean, the fact that we have on a combined basis 33 million of signed, not open NOI, it's pretty easy to see that that's almost 50% of what our potential NOI growth is. And then you look at the chart, and that's where the private market cap rates come in, right? So, you know, I mean, we ran that chart from a 5.5 cap to a 6.5 cap. And you can see the stock, you know, certainly is well into the $30 range, right? So we're well below that today. People will figure that out. The ones that figure it out quicker will make more money, but everybody will make money along the way. The private market cap rate situation, and I know everybody's reported on the recent Blackstone transaction that was a sub-five cap, but that's just one of many, many, many deals that has happened in the last three months that I'd say were in the high four to low five range. And candidly, we've got a six and a six and a half cap on this chart, I mean, you can't buy high-quality stuff at a six-and-a-half cap. You just can't do it. Impossible. Unanchored retail centers are going at five caps. So I think it's a really interesting time right now, and there's a clear dislocation between the private and public market. I've seen it before, and all of a sudden that gap closes. It's going to take a little time for maybe people to recognize that. You know, I can just give you so many examples. We could probably just do that later for deals that are trading in that range, and I think you're well aware of them. So I just look forward to closing the gap.

Thanks, Sean. And maybe if I can ask one more question. Obviously, your balance sheet is in pretty fine fettle, you know, particularly if you include the signed not open income. in there. I think you're talking about the mid fives. As you think about allocating capital going forward and you have more ability to do so and do so maybe a little bit more freely than you have in the past, how do you rank development spend where you're in control of or where you own some assets or in control of the situation a little bit more versus buying in the market at fairly tight cap rates and accounting or having to underwrite a lot of growth. How would you rank that?

That's a great question. I mean, if you look at our investor presentation and the active developments that we have right now in the combined company, you'll see that those yields are estimated to be between 7% and 8%, right? Now, there's obviously – they're not completed, so you have risk associated with the completion. But when you look at risk-adjusted returns, that's the critical element that we're looking at. You know, and there's a multitude of things that we can be doing in terms of the allocation of capital, but clearly our own active development pipeline is one of them. And when we see things trading at, you know, 5 and sub-5 and low-5 – You know, clearly there's a significant amount of value creation in executing on those developments, and that's one of the beauties of this transaction is that, you know, we bring a 35-year history in development to the table in our partnership together. So it's a great opportunity for us to look and, you know, extract value there. But in terms of ranking it, it's all based on risk-adjusted returns, Flores. So in the end of the day, that's why we said we will evaluate each deal individually, independently, no different than underwriting an acquisition and figuring out what the NOI growth is, trying to figure out what, you know, your IRR is, where are the in-place rents versus market rents. How can we leverage that particular property more so than someone else because of our activity in that market? There's so many things that go into that. But, you know, we're just super excited, as you said, to have that kind of balance sheet. And, by the way, growing free cash flow that will enable us to make those choices. And we'll make smart choices. Thanks, John. Thank you.

Our next question comes from a line online. of Paulina Rojas Schmidt with Green Street. Your line is open.

Good morning. Good morning. Can you please elaborate on the reasons why you decided to sell West Side Market? Is it that the property was a 100% lease? And more generally, Can you elaborate on your plans for dispositions and acquisitions for the combined company going forward?

Sure. In terms of that particular sale, yeah, I mean, the property was 100% leased. We felt like that it was kind of a maximized value at that point in time, and we had significant outside interest in the property, so we basically took advantage of what we felt like was the appropriate timing as it related to value and growth. So then we will take that money and redeploy that money into some of these other higher growing opportunities, candidly. And that's kind of how we'll look at it going forward. I think going forward we're going to look at the, you know, each individual asset and what its growth profile is, what the geography is, and, you know, how do we feel that the prospects are going forward. And in that particular one, that's why we made the decision to dispose of the asset. So I think we're going to – that's kind of a microcosm of how we'll look at the macro, you know, just where is the asset in that particular point in cycle and, you know, where can we deploy capital if we think that the growth is kind of – is maximized.

Okay, and then regarding RPI, you said that the company is on track to exceed its last FFO guidance. Can you provide any color in terms of their same property and the wide performance during the quarter, even though that is such a big part of your portfolio now?

I think we're just going to leave it at that they were on track to outperform. For me to give you what their same story suggests, that we have the same presentments, which we don't, And for us to sort of go back and look at their historical results and try to recreate what their same-store would have been is just not an exercise we think that's worth our time at this point. So we will be reporting combined same-store NOI under our presentment. And obviously, you know, the FFO results under our presentment as well and spreads, et cetera. So just be patient. And when we give our fourth quarter results, you'll have a better understanding of what's happening with their operations. But suffice it to say, I use the word outperform for a reason.

Okay. And then the last one, you mentioned, you provided an estimate for land value of some of RPI's pipeline entitled land. I think you mentioned in the past that you might sell some of that land to provide price transparency. Is that something that you're still considering? And if so, do you have a timeframe in mind to make a decision in terms of your plan going forward regarding that?

Sure. Yeah, to be clear, I don't think we were saying that we were interested in selling land just to provide price transparency. I think what we said is that there's significant embedded value in this land bank of entitled land that gives us great optionality to underwrite each one of the potential transactions, future transactions, you know, kind of from the ground up. So It's really more to make the point that from an NAV perspective, there's significant value there. And then we will look, like we always do, at each project independently to analyze the risk-adjusted returns going forward. And I think we gave an example of an opportunity that we're pursuing right now or that is actually under construction, which is a property called The Corner, where we sold the land into a joint venture and retained a 50% interest in the project. So That's just one example of something that we could do, but, you know, we also pursue projects where we own 100% of the opportunity. So it's really going to be more of a case-by-case basis.

And I would say we have always done that, whether it be at Eddy Street Commons, working through an air rights component. We just executed a purchase agreement yesterday to work with the second largest regional airlines. in the country, that's the scenario where we will monetize the land, we will take development fees, we'll end up with project profit fees. So once again, we took a very specific approach to that situation and then ultimately made a decision what's best for the company from a risk-reward perspective. So as we look at this list, that philosophy will continue on on each and every one of these properties.

Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Your line is now open.

Hey, good morning. So, hey, John, one of the things that you, and I think you mentioned in reference to some of the mixed use or entertainment, you know, tenants that you guys will inherit a lot of from the RPAI, As you look at some of those tenants and whether they were ones that were hard hit during COVID or may have had some, you know, some above market rents, as you look at the portfolio now and the way retail has come back, the way F&B has come back, how would you say that your appreciation for the recovery of those tenants and where those rent marks may be is today versus when you guys underwrote the acquisition period? earlier in the year.

Sure. Well, I mean, the good thing is we feel better about it today than we did in the beginning, Alex, right? Of course. I think it's pretty clear that that component of retail was disproportionately hit in the peak of COVID and has now come out of that very strong. In fact, you know, recently I think JLL published a report that it's From an investment perspective, it's one of the hottest subsectors of retail right now.

Which is mixed use? Wait, John, which is mixed use?

I'm sorry, mixed use and lifestyle, basically. Which F&B would be a part of both, right? So I think if you're specific to restaurants, I mean, obviously restaurants, you're always very, very cautious with your – underwriting of that particular restaurant, particularly if it's not a national player with a credit profile. But that's part of the business, and we've always been in that business. So as it relates to this combined portfolio, I think we feel great that that creates a lot more optionality for us, and there's a lot of growth there, Alex. In terms of specific to rents, I mean, again, if you're releasing a space today, A lot of that's going to have to do with your CapEx, right? So how much CapEx are we putting in? What are the returns? And what is that structure? And, again, we have a lot of experience with that at Delray, at Eddy Street, you know, in Rampart in Vegas. So it's not like we haven't done that quite a bit. So long answer, but short answer is, yeah, we're really happy with that.

Right. So, I mean, I, I obviously things have gotten better, John, but I guess what I'm getting at is have those tenants seen accelerated where when you looked at them back when you were originally underwriting the deal, you were like, eh, I don't know about this. It could take a long time. Whereas when you look at them today, you're like, oh my God, these guys are like basically back to normal. And if we had to replace, you know, those tenants, the rent marks would actually be significantly better than what we had thought of originally. That's, I'm just trying to get, sort of a sense of their pace of recovery and how that backfill for those spaces would be relative to when? Because I think that's the focus point. We all know that other parts of retail are great. You know, there's just still some around some of the, you know, sort of peak leasing, et cetera, and how that would fare. So I'm just trying to get that sort of sense with that recovery.

Yeah, no, I mean, no doubt that recovery has accelerated it quite a bit. And in terms of the rents, you know, it really is case-by-case, Alex. But, yeah, when we were originally looking at the transaction, we certainly spent a lot of time underwriting that particular component. And suffice to say, you know, it looks like that component's better than what we thought it was going to be. And we even mentioned in our prepared remarks that When we look at our placer data, I mean, we are above 2019 traffic right now, and that's across the board. So you would think that that would continue, and assuming the macro environment stays the same, you know, we should be able to drive cash flow. I mean, that's the bottom line. We'll drive cash flow and rents. But as he said, I mean, we're still in the middle of the process of marking the you know, debt and rent, et cetera. So we can't comment on that specifically, but we feel pretty good about it.

One thing I'll mention, Alex, is when we first announced the deal, we got lots of questions from investors on how we felt about this increased exposure to mixed use and lifestyle. And, again, as John mentioned in his remarks, is we're all about trying to identify macro trends. So we thought to ourselves, this is great. We're sort of, you know, acquiring this stuff at a trough. And this really represents the ultimate reopening trade, right? We knew it was going to get better, maybe not as fast as it's gotten better as we've seen and seen the traffic and the leasing demands, but we knew ultimately that sector was going to rebound. So we were very, very excited about getting that increased exposure.

Okay. And then, Heath, while I have you on the line, you mentioned that you'll now be a regular way issuer on secure debt markets. So you get the, uh, the choice of, uh, of walking around with the likes of, uh, young Mark Streeter and Terry parents, uh, on the debt, on the debt March, but on a cost of capital basis, you know, when you are pricing, whether it's line of credit or unsecured issuance, et cetera, do you feel that you will have a substantially improved cost of capital, meaning something more than 25 dips or your comments about being a regular way issuer would just purely to say, Hey, you know, get ready because we're going to start issuing in 400 million plus increments.

I will tell you, take a look at some recent issuances for some peers, whether it's PICO, you know, some of the other peers where they're issuing and where our sort of bonds are trading right now because we have basically, you know, an orphan issuance of bonds. We are absolutely going to realize much more than a 25 basis point, you know, appreciation in our spreads. You know, I think indicative wise, we're looking at people are telling us we can be issuing any reference in, you know, 150 to 170. Also, by the fact, by virtue of the fact that we've got 150 to 170 over treasuries. Sorry. That's our spread. And, you know, based on the new rating of triple B with Fitch and, you know, having constructive conversations with S&P and Moody's and hopefully not to the too-far-distance future. We can get them to move as well. Absolutely going to see an improvement in our debt cost of capital and also, hopefully, in our equity cost of capital by virtue of the fact that we're just more liquid and we've got exposure to many more institutions that are willing to come into our stock. So, yes, we think our cost of capital, based on just sheer scale and being a regular issue, is going to improve immensely.

Okay. Thank you.

Our next question comes from a line of Chris Lucas with Capital One Securities. Your line is open.

Hey, good morning, guys. I missed the very beginning of the call, John, so I apologize if you went through this already. But on the people integration, can you give us some sense as to how many people you offered, how many accepted from RPI and what kind of – staffing needs you're left with at this point, given the size of the new portfolio?

Sure, Chris. I think just round numbers, approximately, probably about 50% of the staff, so in terms of retention, and that's just an approximation. And that particular process obviously is difficult. But that's why I mentioned professionalism, extreme professionalism on the RPI side as we went through that process. And so now we feel very, very good that our combined team is just made up of amazing people who are really ready to go. So that's kind of a generalization there.

Okay. And then I appreciate that. And then just as it relates to, you know, getting the offices up and running and, coordinating and all that. I'm assuming that got off okay, but I'm just curious as to whether there are offices that you closed sort of right out of the gate.

Tom, you want to handle that? Sure. Just from an integration standpoint, Chris, one thing we've done is we've worked very hard, obviously, putting together the org charts, getting the proper interface to make the correct decisions. One thing that we did, which was fairly aggressive, we actually brought in seven groups to Indianapolis for full integration periods of about two to three days. We had a comprehensive training for all of them. So the big thing we wanted to do day one is make sure from a responsibility matrix, everyone in this company knew exactly what their responsibility was, property by property. To answer your question on offices, there is... We're going to, for the first year, we're going to absolutely keep offices in check. And I think as we go through this process, we understand the assets. We understand how the two various teams can integrate and work together. Then we'll look for efficiencies down the road. But for right now, we're very focused on executing. And then that office component decision will come down the road.

Super. Heath, just one question for you, just kind of a follow-up on the prior question. On the RPI balance sheet, there was a fairly expensive hedged term loan that was an expiration in 23. Just curious as to how you think about your own and their sort of what I would call not near-term, but just sort of outside of near-term expirations and how, if any... prepayment options you guys are working through on some of that to get repaid?

Obviously, we talked about obviously much improved cost of capital, but I would stay tuned. Obviously, we've got our 2022 materials already handled by cash in the balance sheet. That was with the proceeds of our exchangeables. Obviously, keeping very close watch on where the market is and what we would do with our 2023s. And when the time is right, we'll make sure that we tackle those you know, at the right time. So it's, again, stay tuned.

Thank you. That's all I had this morning. Thanks. Thank you.

Our next question comes from the line of Anthony Powell with Barclays. Your line is now open.

Hi, guys. This is Allison Allman for Anthony. Question just related to the merger. How do you more generally see M&A activity in the shopping center space continuing? And would you be open to further M&A activity going forward? Thank you.

Well, big picture, you know, I think our deal and the Kimco Wine Garden deal both kind of, what's the word, kind of shed some light on the opportunities. You know, these are both transactions I think were excellent transactions, but You know, those are very specific to those points in time and the combinations of the companies that made lots of sense. So do we think there will be more M&A down the road? Probably. Don't really know in what form, you know, whether that's the private market coming in, whether it's public to public. But clearly, you know, even when we look at the landscape today, that's why it was very, you know, it's very important to us to be, you know, one of the top five players in the space because there were just too many players And certainly when you look down at the smaller end of the spectrum, there's really too many small players, particularly. So I think at this point we've certainly made it very clear that we're a major player and will continue to be. Going forward, as Tom just said a second ago, we've hit the ground running. The integration is active. We're super excited about the opportunities ahead. with the portfolio and with the growth that we've laid out. And we can't wait to talk about that early next year because there's significant growth here. But all that being said, I mean, you know, you never know what's around the corner, and we'd certainly always be looking at whatever potential things are out there. But right now we feel great about what we've got in front of us.

Great. Very helpful.

Thanks so much.

Thank you.

Our next question comes from the line of Linda Desai with Jefferies. Your line is open.

Hi, good morning. This is related to Alex's question. Given you lost more occupancy due to having more experiential tenants, as you backfill spaces, how are you thinking about the merchandising mix? Does it still generally skew more experiential, or is there more of an emphasis on essential, which often has a higher credit profile?

Well, I mean, Linda, I think it really depends on the particular property, right? So each one of the – and that's one of the great things about our combination when you look at the balance of the portfolio and how it's balanced against, you know, community centers, neighborhood centers, lifestyle, mixed use, and even a small, you know, less than 20% power. I mean, we are a player across the board, and that's what our customer wants us to be. So we're seeing significant opportunities in the portfolio to merchandise in a real productive way, and sometimes that would be backfilling an experiential tenant with a more essential tenant and vice versa. You're seeing a lot of these tenants like Lulu and Sephora and West Elm and players like that coming heavily into our space. So, I mean, we could go tenant by tenant, but there's so much opportunity there, and it really depends on the particular location.

Thanks. And then what does the transaction environment look like right now? How are you building the pipeline, and are you seeing more supply come online?

Yeah, I mean, there's supply, Linda, but the environment, as we pointed out early on, and I think everyone's starting to finally wake up to, is that the environment's very competitive. You've seen a ton of institutional investor interest in retail, open-air retail, really come about in the last few months, which has obviously compressed cap rates across the spectrum. And I think maybe public investors thought that was limited to the grocery-anchored sector, but it is absolutely not. We're actively engaged in the market and looking at lots of things. And as I mentioned in the, you know, early on, I mean, you really can't, you know, the idea of being able to buy a high quality retail asset, you know, kind of north of six or, you know, anywhere what I think people were thinking before is extremely hard to do and very situational. Whereas, you know, the regular way transactions are basically in the fives and high fours for specific assets, you So it's a challenge, and it's, again, why we love the fact that we have so many different opportunities in front of us right now with our own portfolio and also as we look to redeploy capital down the road.

Maybe this is painting too broad of a brushstroke, but in terms of the Blackstone transaction, do you think their reentry into grocery anchored centers changes the market's competitive dynamics, or is it limited to only certain regions or specific types of transactions? maybe said differently, you know, does their reentry make it harder for public REITs?

Well, I think their reentry just illustrates the fact that the yield that they're getting is super attractive relative to alternative investments for them. So, you know, I think that if you looked at them specifically, because there's a lot of players, my guess is they're redeploying capital from other places And when they buy something at a high four, low five that has a couple percent growth per year, that's a damn good trade for them. So I think you'll see more of it. And they're not going to be the only ones in terms of private capital waking up to that. And frankly, lots already have. And it is not only specific to that segment of grocery anchored either. I mean, there was a deal that traded very – everybody knew about it in Charlotte not long ago that was a large center that traded at a sub-five cap, Linda. So bottom line is it is what it is. The spreads on these yields are still tremendously high. I mean, if you go back to, you know, 2004, 2005, 2006, where cap rates were basically where we are today – The 10-year was at four, you know, most of the time throughout that period. So when the 10-year is sub-two, that's why they're doing these deals and, you know, versus deploying into multifamily, industrial, data, wherever, where the yields are two and a half, three. So I don't think that's going to stop.

Thank you.

Thank you.

Our last question comes from the line of Craig Schmidt with Bank of America. Your line is now open.

Thank you. Yeah, I was wondering what the expected total merger costs for KITE and RPAI might be or a range.

Approximately $100 million.

And would that mostly occur in the fourth quarter or spread out in 2022?

It'll be predominantly in the fourth quarter with some of it in 2022.

Great. And then I was wondering if you retained any of the leasing team from RPAI, particularly with thoughts regarding mixed use and lifestyle tenants.

Yes, we were able to keep a great majority of the leasing team and We're very happy to have them as part of the company, so we're working very closely with them. We've reallocated some of the property assignments, but they're going to be playing an integral part of what we're doing moving forward on those assets you described.

Great. And then just finally, you know, what do you think the cap rate is that you paid for our PAI?

Well, Craig, like, you know, when we talked about we announced the deal based on at the timing of the transaction and exchange ratio kind of in the mid-six range. But, you know, we're also pointing out that we have the entitled land bank. We have the upside. So, look, it was a great transaction for us and for them, for both parties, because now we're combined as one, especially when you look at what's going on in the market right now. I think it was a phenomenal transaction.

Thanks. I appreciate it.

Thank you. As a reminder to ask a question, you will need to press star then 1 on your telephone. Our next question comes from the line of Tammy Feek with Wells Fargo Securities. Your line is now open.

Thank you. I'm just wondering if you could describe the unrealized remaining synergies and, you know, how we should be thinking about that in terms of timing. Should that be realized, you know, largely in the first half of 2022, or will that come in kind of pro-rata over the next 12 to 18 months?

We said in our MR to deal with the next 12 to 18 months. It's things like software licenses, transitional employees, et cetera. So those are the remaining realized synergies over time. So, yeah, again, we'll give more details on those sort of things on our fourth quarter call.

Okay, and then maybe just for the kite portfolio, you did make good progress on the occupancy front this quarter. I guess I'm just wondering if you could elaborate on the anchor signings completed during the quarter, like who specifically is taking that space, and then maybe going forward for the remaining spaces in the anchor program, do you expect to see more box splits, or are you seeing enough demand for larger boxes at this point?

Well, first of all, you know, we talked about the fact that we had seven in the quarter, which is a tremendous number. And three of those were grocery stores that will play an integral part in each and every one of those shopping centers. And in addition to that, we had two subsequent executions from the quarter. But if you look at some of the tenants, man, it's a good distribution of buy-by-baby, five-below, sprouts, bells, so it's a good balance of tenants and I think the most important thing we did without question is we improved the quality of each and every one of those tenants that's coming in from the previous And more importantly, we also increased traffic, which was a huge priority for us as we took off on this path. So moving forward, we see this balance to be fairly similar. We've been very fortunate not to have to split many boxes. We've exceeded our expectations. So the demand is there. The quality of the real estate is there. So I think you're going to see our momentum continue.

So also, Tammy, I'd say, you know, to add to Tom's comment and what you're, I think, thinking about in terms of the types of users we're putting in, I mean, we've only had to split one or two boxes, I think, throughout this anchor acceleration. So that's also reflective in why our CapEx cost has been very, very moderate, frankly. I mean, when you look at the anchor acceleration program where right now we've done 12 deals And it's at $50 a foot. And when we started, we said we kind of conservatively put out there $100 a foot. Well, we're obviously well within that. Maybe we'll have one or two splits going down the road. But the reality is because there's so much demand on the retail side right now, I mean, we're able to kind of dictate what we're doing relative to the boxes. So we don't have to split unless we want to split. The split we did, frankly, in Portofino in Houston, we absolutely wanted to do that because we brought Adidas into the mix. So Tom only mentioned a couple names. I mean, this is broad spread demand. This is about, you know, every value player, Ross, TJ, Burlington, all these guys are very active. All the grocers are active. And in addition to that are the players like an Adidas who's coming out of the malls and into the open air, and a lot of other players like that. Old Navy is on a significant expansion program. In all of our years of doing this, the supply-demand characteristic is very strong right now, and that's why we're super excited about the merger. I mean, we just have, you know, we've doubled our exposure into these markets that we want to be in, and we added to it these kind of strategic gateway markets that where you just can't get in. I mean, and when you look at the price that we got into the total transaction, we just have tremendous amount of upside. So I know there's a lot, you know, left for us to talk about as we get into 2022, but I wish we could fast forward to that right now, but we'll do it shortly.

Okay. Yeah, I appreciate that. But then maybe taking, you know, kind of a different perspective and asking a more general question, I guess where do you see kind of the greatest potential pressure points for your business as it relates to supply chain and labor shortage issues that are, you know, obviously taking all the headlines today?

Yeah, I mean, look, obviously retailers are impacted by the supply chain, but the majority of our customers, you know, were well in front of that. And so at this point, you know, certainly they've seen some disruption, but look at the results they're producing today. in general. Now, some of them are more subject to it than others, but this is one of the benefits of being the landlord and not the retailer. We have a contractual rent stream. They're doing great in our shopping centers. Our traffic is up. So I know there's a lot of focus on it today, but my personal opinion, when we get into the back half of 2022, maybe even the second quarter of 2022, Much of this should moderate, and again, this is my opinion. And on the labor side, you know, it predominantly has already been absorbed. Again, even there, you're starting to see some things loosen up a little bit as we get further and further away from some of that artificial, whatever the word is, the ability for people to generate income outside of the workplace is starting to moderate a little bit. And the savings rates are, you know, also moderating. So you're going to see more people return to the workforce. But overall, I think, you know, Tom, I don't know if you want to add to it. Our customers have handled this quite well.

Yeah, I mean, I think the only place we've seen a pinch point is the restaurants and quick serves. And, you know, sometimes they'll modify ours. But it's not an impact that has affected us as a company and as a landlord.

Okay, great.

Thanks for taking my question.

Thanks.

Thank you. As a reminder to ask a question, you will need to press star, then one on your telephone. Our next question comes from the line of Wes Galladay with Baird. Your line is now open.

Thanks for staying on. Have you seen tenant retention return back to the pre-pandemic levels, and is it the same for, I guess, any noticeable difference between shop and anchors?

Yeah, actually, it's interesting. It's actually higher. Our tenant retention this year is actually higher. So we're a little over 90% right now, and it's generally in the high 80s. So it's been interesting. And again, I think that just goes back west to we're in a pretty good space. I mean, look, honestly, this business is firing on all cylinders. And Class A, you know, open-air retail is sought after highly. So, you know, the tenants that we have want to stay, and there's plenty of tenants that want to take space if they become available.

I guess with all that strength, maybe when we look to next year, maybe 2023, are you starting to look at spots maybe where you play a little offense and go for some recaptures?

Yeah, I mean, look, that's a sensitive thing. We're always working with our customer in the best possible way that we can. You know, there was certainly a lot of recapturing that occurred through COVID. You know, Stymart's a great example of a tenant that we would have loved to have recaptured for a long time, and we finally did. And now, look, we're seeing significant benefit from that. So, yeah, I think that case by case, Wes, but, look, we're in the, you know, We take care of our customers, and we want to work with the customers that we have. But obviously, if we have a customer that can't pay the rent, then we're going to have to move to the next one.

Yeah, that just happens organically. If somebody's looking for a deal that doesn't work within our parameters, that just happens naturally. So we like our position right now.

Got it. Thanks for the time. Thank you.

Thank you. To ask a question, you'll need to press star then one on your telephone. There are no more questions. I will now turn the call back to John Kite, Chairman and CEO, for closing remarks.

Well, again, I just want to thank everyone for joining us today. You know, this is a momentous call for us. We're super excited about the opportunities that lie ahead. in the combined company, and thank you for listening. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.