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spk00: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. Thank you.
spk05: Good day, and thank you for standing by. Welcome to the Kite Realty Group's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian McCarthy, Senior Vice President of Corporate Marketing and Communications. Please go ahead.
spk12: 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 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 are Chairman and Chief Executive Officer John Cutts, 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 will now turn the call over to John.
spk14: Thanks, Brian. Good morning, everyone. So before we dive into our strong quarterly results, I wanted to take a moment to mark the one year anniversary of our highly successful merger. While we knew from the outset this was going to be an incredible transaction, we significantly outperformed both internal and external expectations. Due to our best in class operating platform, and the strength of our high-quality portfolio. Over the past year, KRG generated a quantum leap forward across every meaningful metric. Of the top 10 open-air peers by total enterprise value, we rank first in year-over-year FFO growth, first in year-to-date blended cash spreads, first in NOI margin, first in recovery ratio, and first in year-over-year decrease in G&A as a percentage of total revenue. We rank second in net debt plus preferred to EBITDA, second in year-to-date leasing production as a percentage of our total GLA, second in percentage of ABR coming from the Sunbelt, and second in signed not open NOI as a percentage of same-store NOI. We also rank fourth in liquidity as a percentage of total enterprise value. The numbers I've listed are remarkable, and we've demonstrated our ability to operate with the best in the industry. When you compare metrics across our sector, we stack up much higher than we're given credit for, and I specifically wanted to call attention to that before diving into our results. Turning to our fantastic results, KRG generated FFO as adjusted per share of 48 cents, beating consensus estimates by 3 cents and representing a 45% increase per share over the comparable period last year. Our same property NOI growth for the quarter was 4.4% and 4.7% year-to-date. Heath will discuss guidance and provide more details around the components of these metrics, but suffice to say, we're continuing our streak of outperformance. The primary driver of KRG's results has been our outstanding leasing performance. We signed 221 leases representing nearly 1.6 million square feet this quarter, which is an all-time high for the company. To put that in context, that is 5% of our total portfolio GLA in this quarter alone. The strong leasing volume was bolstered by blended cash spreads for comparable new and renewal leases of 10.8%. Excluding option renewals, blended cash spreads for comparable new and non-option renewals were 15.8%. For the first three quarters of 2022, we've leased over 3.8 million square feet at blended cash spreads for comparable new and renewal leases of 12.9%. To provide some additional color on our spectacular leasing efforts year to date, I'd like to highlight three important metrics. We achieved return on capital for comparable new leases of 37%. Comparable non-option renewal spreads have been 11%. And our retention ratio has been just under 90%. Leasing vacancy continues to offer us the best risk-adjusted returns available, and retailer demand remains strong. The KRG portfolio and team are firing on all cylinders. In addition to the robust leasing environment, we're making excellent progress on delivering our $38 million signed not open pipeline. Our pipeline decreased by $3 million sequentially as rent commencements moderately outpaced new leases signed. Tenants continue to commence rent ahead of our internal budget and the timing for the NOI to come online can be found on page 10 of our investor presentation. Our team's ability to deliver spaces on time and on budget in a supply chain constrained world is a testament to the intensity that we have within our organization. The sign not open pipeline continues to bode well for our NOI growth trajectory. As tenants commence rent, and we continue to lease additional space. As a reminder, the $38 million of signed not open NOI is only a portion of the near-term growth opportunity as shown on page nine of our investor presentation. Leasing our active developments and the balance of the portfolio to pre-pandemic levels would equate to an additional $23 million of NOI coming online over the next few years. On the development front, we have four active projects remaining with limited future capital commitments of just under $60 million. As we've mentioned, our near-term capital outlay is primarily dedicated to leasing. In addition to our leasing efforts, our development team continues to further enhance the value of our entitled land bank. In fact, we recently took a significant step in establishing our vision for our adjacent land at 1 Loudoun, We received rezoning approval to convert 2.9 million square feet of commercial GLA to 1,745 multifamily units and 1.9 million square feet of commercial GLA. Adding entitled multifamily units at One Loudon is a huge win for the project, considering the first phase of multifamily materially outperformed the pro forma absorption rates and rents per square foot. As a reminder, we'll prudently evaluate each parcel in our land bank to determine the highest and best use of the real estate and the best risk-adjusted returns for KRG. The culmination of all the great things I've just discussed is allowing us to raise our 2022 FFO as-adjusted guidance to a range of $1.86 to $1.90, a five-cent increase per share at the midpoint. We're also raising our 2022 same property NOI into a range of four to 5%, an increase of 50 basis points at the midpoint. I'm extremely proud of the KRG team's dedication and relentless efforts to produce our strong results. We've definitely come a long way in the past year, and we will continue to showcase our operational excellence.
spk11: I'll now turn the call to Heath Good morning and thank you for joining us today. As we mark the one-year anniversary of the merger, I am in awe of what our team has been able to accomplish. Looking a little further into the past, it is evident that the sheer velocity of positive change I witnessed at KRG over the past four years is unparalleled in my career. All this change would not be possible but for the boldness of our initiatives and the tenacity of our people. We are in the business of fulfilling our promises to our stakeholders. And that's exactly what we've done. Project focus in 2019, our sector leading COVID response in 2020, the execution of the transformational merger in 2021, and the intense integration efforts over the course of 2022. All of these are promises kept. Here's one more. We promise to work tirelessly until we get the appropriate credit for all the progress John noted in his remarks. Turning to our results, for the third quarter, KRG generated 48 cents per share on an as-adjusted basis. Same property NOI grew by 4.4% this quarter, with 260 basis points of this growth being driven by contractual rent bumps and increased occupancy, and 100 basis points attributable to an increase in net recoveries. Due to our continued leasing out performance and higher levels of overdraft versus our initial expectations, our same-store results this quarter beat our internal budget. Given our same-store guidance was increased 50 basis points to 4.5% at the midpoint, it is safe to assume that our same-store growth for the balance of the year is expected to be largely in line with this quarter. As John noted earlier, we are raising FFO as adjusted guidance to a range of $1.86 to $1.90, which is a 5 cent increase at the midpoint. From this point forward, we don't anticipate any further variance between FFO as adjusted and NAVATE FFO as we've lowered our estimated merger costs to $2.5 million from $4 million, which is offset by prior period collections of approximately $2.7 million through the third quarter. Four cents of the guidance increase is attributable to same property NOI in the form of leasing outperformance, higher overage rent, and a higher retention rate. The other one cent is attributable to the change in our assumption regarding the impact of our full year transactional activity from neutral to one penny accretive. Furthermore, at the midpoint of our FFO as adjusted guidance, we kept our bad debt assumption flat at 1% of revenues. As you look toward 2023, please refer to page five of our investor presentation. While you are not in a position to discuss our internal outlook, we have highlighted some of the components of our 2022 FFO guidance that will assist you in modeling into 2023. On the balance sheet front, we had a very active quarter. Our net debt to EBITDA stands at 5.4 times, which is in line with our long-term target. As previously announced, this past quarter, we upsized our line of credit by $250 million, and we issued a seven-year, $300 million unsecured term loan and fixed the interest rate at 3.9%. It's important to note that our line of credit is currently undrawn, and with $1.1 billion in capacity, we have enough dry powder to satisfy all of our maturities through 2025. As mentioned on prior calls, our goal is to retire our maturing debt with proceeds from unsecured issuances once the fixed income market stabilizes. As previously disclosed, last December we entered the two forward starting swaps for an aggregate notional amount of $150 million. We were fortunate enough to lock in the 10-year swap rate at 1.36%, which at the time was equivalent to 1.52% 10-year treasury. Subsequent to quarter end, we cash settled both instruments when the 10-year hit approximately 4.2%, generating total proceeds of $31 million. For accounting purposes and based on our intent to issue fixed-rate unsecured debt in the future, We will be realizing the proceeds as an offset interest expense amortized over the next 10 years, starting in 2023. With our leverage and liquidity profile, we feel extremely confident headed into next year. We like to say that our balance sheet is built for all weather conditions. The news and our conversations of late have been dominated by anxiety associated with the economic gloom. However, negative speculation regarding 2023 is useful to the extent it helps us prepare. At this point, we are fully prepared. Our time is better spent planning for the potential opportunities that lie ahead. Thank you to everyone for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.
spk05: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Todd Thomas with KeyBank Capital Markets. Please proceed with your question.
spk09: Hi, thanks. Good morning. A couple of questions around the guidance, the revised guidance. Heath, maybe you can help us bridge the move down from 48 cents in the third quarter to 45 cents at the midpoint of the revised guidance for the fourth quarter. Didn't seem like there was anything really non-recurring in the third quarter. You know, lease term fee income was pretty minimal. And, you know, just curious if you could maybe provide a little bit of detail around that step down as we look forward. Sure, Todd. Sure.
spk11: Yeah, absolutely. So first of all, there was a land sale gain, which is nearly a penny in the quarter. So that's sort of a one-time item. Again, these things recur, but they're unpredictable. We also said in our investor deck on page five, our development fees are decelerating. And we had some nice outperformance this quarter of overage and specialty rent. And while we hope to be able to repeat that into the fourth quarter, it's something that we can't bank on. So Again, you know, it's a slight deceleration based on some things that were, like I said, recurring but unpredictable that happened in the third quarter.
spk14: I think I'd just add that, you know, it's a range, Todd. So we're giving you a range. And, you know, so far this year we've outperformed. So, you know, we would hope to be in the top end of that range, not the midpoint. But we'll see. As he said, there's a couple unpredictable things, but it's a range.
spk09: Okay, with regard to the income, so yeah, I see that and appreciate that, you know, those 23 considerations that you provided in the slide deck. So, $6.6 million of fee income, you know, what should we be thinking about in terms of how that moderates, you know, going forward? I mean, what's an appropriate range to consider relative to that $6.6 million?
spk11: That's a great question, Tom, and really, we'll have some more visibility on that in In February, the issue is that we're sitting on a project with a third party that will maybe or may not commence into next year. So we have the development fees from the existing project or sort of trailing off into 23. And then there's a potential that, you know, we'll sign up something else and have some additional fees in the back half of the year. However, I can tell you that it's going to be less even if we start that other project. And so maybe for your purposes, thinking about it as maybe half. or a little less than half going into next year is probably the right number. But, again, we'll have more visibility in February in terms of where those fees will be and whether or not we've got another project started.
spk04: Yeah, and we're working on it right now in the first phase, so we are hoping to take that to a continuous point. But like he said, we'll wait for the final information.
spk09: Okay, got it. And then regarding the – the one cent increase in accretion from investments that were completed during the year and that change to the guidance. What was the driver of that?
spk11: At this point in the year, Todd, we don't think we're going to close anything else for the balance of the year, and we're a $25 million net acquirer at this point. So just based on the fact that the acquisitions were earlier in the year than the dispositions and that we're slightly a net acquirer, it's just math works out to one penny.
spk09: Okay. All right, great. Thank you.
spk08: Thanks.
spk05: Thank you. And our next question comes from Craig Millman with Citi. Your line is now open.
spk10: Thanks, guys. Just kind of curious here with RPI kind of in the books for a year, could you just maybe walk through your experience on you know, maybe the performance relative to underwriting or, you know, any disconnect between the performance of that portfolio, the benchmark to market versus the legacy portfolio. I guess I'm just trying to get at how much of a kind of a topper on growth this could continue to be if you guys continue to kind of bring the value out of it.
spk14: Hey, Craig, I'll try to, I'm trying to, understand the full question but in terms of just you know i think we were pointing that out in our comments that um the performance a year in you know absolutely exceeded expectations um and if i mean if you just look at where we started the year in terms of the midpoint in our guidance and you know we're 10 above that now so i mean each quarter that has gone along the leasing has been pretty balanced across our total portfolio. And it's also, you know, in terms of the top line rents, they've grown, you know, each quarter as well, if that's what you're asking. So, I mean, I think, you know, at this point of year end, you know, as you know, we don't really look at these properties independently. We look at the totality of the company and we're in a really good position right now, you know, with our sign not open pipeline, our balance sheet, And actually the fact that we have room to run on our occupancy, right? So, you know, overall, I don't think there's any one particular thing in terms of the underwriting that is different other than the fact that we outperformed our estimates on, you know, rent and the timing of the lease up. I mean, we significantly outperformed in those two categories. And we've talked about that each quarter, and it's coming from the different elements of all of the property types that we own. And I think it's really important that we have that balance between neighborhood centers and community centers and lifestyle and mixed use because we're able to generate these returns, those returns on capital we talked about, north of 20% while driving FFO and cash flow. That may not be exactly what you were looking for in the question, but that's how we feel right now.
spk10: Yeah, no, I probably phrased it a little bit weirdly. I guess I was just trying to get at, you know, you guys did raise guidance by about 10% this year. How much of that may have been outperformance from RPAI versus outperformance from kind of a legacy portfolio? And as we head into 23, is there maybe more juice from RPAI and then maybe what you guys are willing to underwrite going forward. I'm just trying to, it was just a way of getting at, you know, is this a sort of upside that's maybe not quite as understood by the street?
spk14: Yeah, no, I appreciate that. And I think you're right. It is misunderstood. And the fact that, you know, our operating platform really you know, has shined across this combined portfolio. And yeah, there's no doubt that in the acquired portfolio that there was opportunity for us to step in and squeeze more out of, you know, the orange, so to speak. So yeah, I mean, I think we think that continues. It's why we've kind of set it up, you know, the way we have in terms of looking into the year end, And again, when you have, you know, one of the very highest percentages of signed, not open NOI in the space as a percentage of your total NOI, you know, you've got more room to run.
spk10: Yeah, that's helpful. Just in the quarter, you guys had a pretty good step up in renewal leasing versus new. I assume maybe some of that is higher retention. I mean, could you just talk about the experience you guys had over the last couple of quarters? on tenants really looking to stay in space despite rent increases and, you know, how that bodes for kind of a 23 role?
spk14: Sure. Tom, you want to hit that?
spk04: Yeah, I would say there's no question about the fact that the overall demand generators have really helped us in terms of our ability to both maintain and secure new tenancy. We're in a position right now that we have a limited amount of space, and as part of that, the demand is truly outpacing what we have. So we're hoping that that situation continues, and that has been the basis for us for being able to generate strong returns and be able to generate the numbers that we're reporting here today. But we like where we are at this point. We'll proceed forward in a cautious manner, but all indications, if you look at our pipelines, through the fourth and first quarter are not showing slowdowns.
spk10: Okay, and then if I could slip one more in for Heath. Just on the amortization and derivative game, I missed how many years that's going to be amortized over, and I just assume it's probably just ratable. Is that the way to look at it?
spk11: It was a 10-year swap, so it's over a 10-year term, and that amortization will start in 2023. Great.
spk10: Thanks so much. Thanks.
spk05: Thank you. Our next question comes from Jeff Spector with Bank of America. Your line is now open.
spk02: Hi. Good morning. I guess my first question just, again, Greatly appreciate all the comments and the great presentation comparing your metrics versus the peers. So just trying to pinpoint what you think the disconnect is. Is it too much of a focus, let's say, on average size center, demographics? Is it maybe just a few quarters where you consistently are delivering these type of numbers to close that multiple gap? What are your thoughts?
spk14: Hey, Jeff. Yeah, look, I mean, I wish we knew the specific answer to that. I think our job is to lay out the disconnection and then work to, you know, fix that. I think, you know, when we look at the total picture, part of it, I mean, instinctually, I would say when a company does a major merger, you know, a year ago, it more than doubles in size at a complex time in the world. You know, I think there was a lot of... You know, people wanted to wanted to see, you know, a show me story. And I think we've clearly, clearly, clearly shown them. And now we just need to get people to understand that you're looking at a company that stacks up as one of the best in this open air shopping center business, but is priced. you know, in an opposite way. So I can't tell you exactly, Jeff. I mean, when you talk about demographics, you know, our demographics are strong. The three-mile average household income and three-mile population are both over 100,000. We're in the Sun Belt. We have a good mixture of, you know, grocery-anchored properties. So we check the boxes, and more importantly, we've outperformed. I mean, we've just flat-out outperformed, and that was what I laid out in my opening remarks. So when you have this combination of quality real estate, one of the best teams in the business, and outperformance, we do not understand why it's not reflected. Thanks, John.
spk02: Fair comments. My second question then is just on the signed but not opened. What are the risks, I guess, if you think about the next 12 months at least, on the opening, in particular anchors. Is there any risks around these sign leases and openings compared to your chart where you lay out kind of the expected income over the coming years?
spk04: Well, I will tell you one thing, and part of this relates to our construction backgrounds and a group that has been doing this for a tremendously long time. we have a mentality that we're going to figure out whatever it takes to make it happen. And I will tell you that we're sourcing parts in China. We're looking for different components for switchgear. We're trying to figure out the pre-sourced mechanical units. So there's a tremendous amount of work that goes on to make sure we hit these dates. But I think you can be assured that this team's got a lot of experience on how to deal with issues. We have a building right now that has an 800 amp service in it, and we're not going to have permanent power for a while. And we're figuring out how to get underground power to it. So we're going to figure it out. And that's our mentality. But it's a battle. I will tell you that. But that's what this team does. So we have confidence in our ability to deliver at the end of the day.
spk14: I mean, Jeff, bottom line, though, if you look at what we've done this year, we've delivered on time. This year, in fact, we've been ahead of schedule. So I think what Tom's referring to is this is another reason to own this company because we have the background, we have the strength in a particularly complicated world in construction that a lot of our other peers don't have because that's how this company started. It was a construction company when it started. And we don't anticipate that we'll have any problems continuing to do that next year in 2023. And frankly, when you do have a problem, it's 30 days, it's 60 days, whatever, the rent's coming. So this idea that maybe people don't understand what sign not open means, that rent's coming. it's a matter of which month it's coming in, and we lay it out in our investor presentation as good as we can, and we believe that that's pretty accurate.
spk04: Thank you. Our job is to drive to hit it. It's the bottom line.
spk02: No, thank you for the comments. I guess to clarify, and we still get that question, you know, in particular, again, on the anchors, are there any clauses where the anchor could still, you know, back out?
spk14: I mean, in general, obviously, you cannot over-categorize something like that. Each deal is different. Every lease has some nuance to it. But when you're talking in general, that's not a big risk of anchors backing out. Generally, once you're under construction, it's really all on the landlord, and you've got times built in for cure, et cetera. It would be rare. I mean, is it possible? Of course, it's possible. but it would be very rare. We can't remember the last time. I mean, I honestly can't remember.
spk04: It has not happened to us within the last decade, I can tell you that.
spk14: Very rare. But, you know, I'm glad you bring that up, Jeff. If that is a question, I think people are missing a lot of potential upside there for us. Great. Thank you. Thank you.
spk05: Thank you. And our next question comes from Wes Galladay with Bayard. Your line is now open.
spk15: Hey, good morning, everyone, and congratulations on the new zoning at Loudoun. I'm just curious if you're going to do more of the residential yourself or are you going to lift the joint venture of the platform?
spk14: I think like we talked about, Wes, I mean, we're going to analyze this like we're going to analyze every, you know, land parcel that we own. I think we've mentioned in the past we generally like to look at these from the perspective of, what is our, you know, what's the highest return on capital we can get in any particular situation. So we haven't determined yet exactly what the structure will be. I mean, we just got the rezoning within the last few weeks. The point I think we're trying to make is that the land value, you know, has a significant bump relative to what's going on in that particular market in multifamily. So we'll just take that one step at a time. But whatever we do, we're going to maximize the value for KRG. Got it.
spk15: And then as we look to next year, not looking for guidance, but is there any other moving parts that we should be aware of? We discussed the fees. We discussed the swap. One of the questions we're getting is, is there anything on the non-cash fair value adjustments as we go into next year? Anything along those lines or any other things you want to call out that may be one time in nature?
spk11: No, we set them all forth on page five of the investor presentation. There's nothing occult happening in the non-cash. So Again, we're not prepared to give our fellow outlook for 2023, but we don't expect any non-cash surprises.
spk15: Got it. Thanks, everyone.
spk11: Thank you.
spk05: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. In the interest of time, we ask that you please limit yourself to one question and one follow-up. One moment for our next question. Our next question comes from Connor Mitchell with Piper Sandler. Your line is now open.
spk13: Hey, good morning. Thanks for taking my question. I guess just looking at a big picture view, so we see the headlines of inflation and impact on people's abilities to shop, retailers with tough earnings and sales. But when you guys are talking to your tenants and the retailers, does it seem like there's any correlation to their demand and maybe if they're changing their real estate positioning
spk14: No, I mean, not at this point. As we pointed out, I think in our remarks and our results, at this point, we continue to see strong demand for an ever-shrinking supply base in Class A open-air retail, which is what we own. Sometimes people like to draw these correlations that are second derivatives that don't necessarily happen right away. I would say that our conversations now continue to be long-term conversations. And we've mentioned this before, that when you're dealing with a quality retailer, they're thinking about their physical real estate in the sense of decades, not months. So these are decisions that are generally decade-long decisions, investments in that platform. And I think it's been pointed out on other earnings calls that it's pretty darn clear that the profitability in retail is generated in the physical space. There's a lot of reasons why you do other types of retail. But if you're looking to make money, you need physical space. So I think that kind of combination of things is really great for us. And we take it one month at a time in terms of the overall economy. but right now, you know, continues to be pretty strong.
spk13: Okay, that's helpful. And then I guess just kind of sticking with the big picture theme, but maybe narrowing it down to the markets and the different regions you guys are in. I mean, you pointed out that you're in the Sun Belt, but I guess just it's more of a focused thing on the Sun Belt, or are you guys also looking at some of the highest growth markets that you point out in your IR deck? It seems that a lot of your acquisitions are in the Sunbelt or southern regions versus dispositions being further north. So if you guys could just touch on the markets update.
spk14: Sure. I mean, yeah, we definitely are and have been focused on the Sunbelt markets. I mean, but we are also very fortunate to own extremely high quality real estate in some major metros, such as New York, Seattle, Chicago, et cetera, that would not be on that Sunbelt kind of definition. But when you own 200 properties and you're looking at growth rates and you're looking at opportunities to increase cash flow, that's really what's driving our decision making. But, you know, we continue to be, you know, very enamored with the markets that we're in. And, you know, as I pointed out in the past, you know, we're the only open air major player that owns 40%, you know, the 40% of the revenue comes from Texas and Florida. So, you know, you can't deny that those two states are very, very important. That doesn't mean that, you know, there aren't other markets that are important and there aren't other markets that we're in. So I think our balance is very good and will continue to grow where we see appropriate going forward. Okay.
spk13: Appreciate the comment. Thank you.
spk05: Thank you. And our final question comes from Linda Sy with Jefferies. Your line is now open.
spk01: Hi. It seems like the 19 signed but not occupied coming online and 23 is a nice cushion. Could you remind us the expectation for bad debt this year and what you're thinking about for 23?
spk11: Yeah, bad debt this year, as I said in my remarks, the assumption is 1% of revenues. And then, you know, I'd like to sort of pass on the next question. In February, I'll have a better view of where we think bad debt will be for 2023. And we took a very conservative approach this year, started out with 150 basis points into 2022. I wouldn't be surprised if we're looking in 2023. We take a conservative approach, probably not as conservative as 150 basis points, but maybe a little bit higher than what our historical average is based on just some of the headwinds we're seeing. So, again, it's something that we'll have a lot more clarity on in 2022. in February when we give our full year guidance. But, you know, again, I think it's going to be prudent for us to remain conservative on our assumption.
spk01: Helpful. And then, nice same-store NOI growth momentum and, you know, raising guidance by 50 basis points. How are you thinking about it preliminarily, same-store NOI growth for 23?
spk11: It's going to be good. You know, obviously, the a stacked S&O pipeline. In addition, we had leases that turned on last quarter that are going to be fully annualized into 2023 as well. So we're at this point in time, and again, we'll know more in February, and we're going through our budget season here in November to re-look at all of our assumptions heading into 2023. But the preliminary outlook is that we're looking at a very, very strong same-store NOI heading into next year.
spk01: Got it. And then why did merger integration costs estimate? Why did that Why did that go down so much?
spk11: There were some technology items that we had conservatively budgeted to be higher than they were. And some of those items were, you know, again, it just was less costly. Some of those items were going to trickle into next year. So, again, it's just basically technology costs.
spk01: Got it. Just one last one for John. When you look across the different formats, community, neighborhood, mixed-use, power, where are you seeing the most leasing competition from retailers?
spk14: Well, I mean, I think it's competitive across the board, Linda. I mean, I think, you know, probably the segment that has picked up a ton this year, as we pointed out in the past, is the lifestyle segment. You know, so we've seen real strength there, but we've also seen real strength really across the board. So I just think, again, I'm going to pound the table, as one person put it, you know, we're in a shrinking supply world. So, you know, the macro is maybe a little less sensitive in the sense of this idea that we have headwinds. I mean, I hear that. I understand that. But the reality is, as I said, these tenants are making really long-term decisions. They have limited quality space and they're moving around. I mean, you know, as we said before, I mean, we did an Adidas deal, for example, in a power center, and it's performing extremely well. You know, you look at Total Wine and what they're doing and the different types of properties that they're going in. I mean, I can give you a long list. Tom can give you even a longer list. I think that it's actually pretty strong across the board is what I'm trying to say.
spk01: Got it. Thank you.
spk14: Thanks, Linda.
spk05: Thank you. And we do have an additional question from Christopher Lucas with Capital One.
spk08: Can you hear me?
spk03: Got you, Chris. Okay. Sorry. I started before you, maybe. Anyway, I missed a bunch of the call. I just wanted to find out, and if you touched on it, don't worry about it. big spike in the maintenance capex for the quarter. Was that specific to Ian?
spk14: No, it was not Ian.
spk03: Sorry.
spk14: Everybody, that was definitely not Ian. But go ahead, Tom. Yeah, so on the – go ahead, Chris.
spk03: I was just going to think, but what drove that big spike?
spk04: Yeah, so the spike related to a couple items. One is we're coming out of COVID. which delayed some of the process. The other one was we were really trying to contemplate what is the best way to spend this capital during this inflationary supply chain situation that we had. So we moved some things out of roof because of pricing being so high, brought them down in the parking lot. So we were really maneuvering, trying to get the best bang for our buck. And that really pushed us to create this higher spend towards the end of the year. And then I think the final thing, Chris, is we spent a lot of time going through the portfolio, through the merger, and we wanted to make sure that everything in the portfolio met the standards. And there were some things that we wanted to address to make sure we had consistency throughout the platform. So that's an overview, but it was really just the timing and and a lot of hard work going in to make sure we got the best pricing possible.
spk14: I mean, to say it another way, Chris, I mean, we have strong free cash flow, so we're investing in the properties, as Tom said. So, you know, I don't think there's a particular one reason, and some of it's seasonal, by the way. But going into next year, you know, we will continue to spend and invest in these properties, and that's one of the beauties of having good free cash flow.
spk03: Thank you. And then, Tom, while I have you, so you've got a good, strong S&O for next year. What is the likelihood at this point that, you know, sort of your pipeline of deals will contribute to next year's AVR contracts?
spk04: You know, I can't be too specific, but we have a very nice pipeline of boxes coming up, and so I think we're going to continue to see nice growth in that area. I was just looking at that list as we came in, but we feel like our run is going to continue into 2023. And then obviously we're going to try to open as many of these projects as possible based upon my previous comments and get them done in the most efficient way. But we still have a lot of gas in the tank in terms of pushing those that signed in a lot.
spk03: Are you guys running into any permitting delays or is it mostly supply chain that is impacting it, if at all, your ability to get commencing?
spk04: Yeah, Chris, I was down in Florida last week, and we were touring all the properties that ran into issues. We were very fortunate to end up with a number of damage around 1.5 million, so we felt very good about that. And the group is already jumping on taking care of those and getting them fixed as quickly as possible. So overall, I mean, I think we feel pretty good in terms of where we are on that whole front.
spk03: And then last one for you guys, for me, is operating margins, recovery rates all bounced up nicely, at least on my numbers. One of them is at a record level. I guess I'm just trying to understand, is All of the opportunity that you saw in the RPAI portfolio fully wrenched out now in terms of those kinds of metrics, or is there more opportunity to come?
spk14: No, we don't think that we've gotten where we want to get, Chris, and we have more room to push there. You know, I think, as we pointed out in the past, there's many ways to do that, but one of them, you know, that we were very successful with historically was fixed CAMP. And the RPAI portfolio was at, you know, basically had no fixed cam. So we've gone from maybe about 50% to probably 35%. That's off the top of my head, but I know it's close. So there's room to run there. And then just getting more and more efficient in the way that we operate and then also, you know, how we price things. So I think we hope that we continue to press that, just like we'll continue to press our lease percentages You know, we still have good room to run, so I'm really excited about the opportunity to get back to pre-COVID levels.
spk03: Great. Thank you, guys. Appreciate it. Thanks, Chris.
spk05: Thank you. And our next question comes from Paulina Rojas-Schmidt with Green Street. Your line is now open.
spk06: Good morning. Morning. The Albertsons and Kroger merger was a reminder of the risk of seeing further consolidation in that industry. So I'm intrigued about how you think about this risk, broadly speaking, not just related to this merger, and if you incorporate that in any way in your leasing decisions when you evaluate gross or deals.
spk14: Hey. Look, I think in any industry that has potential consolidation, you're always looking and trying to think through how your portfolio is affected by that. In this particular situation, you know, we don't see this as a big risk to our portfolio. You know, our largest grocer is Publix, which is an extremely strong independent private grocer. So in particular in the grocery sector, I don't see this as a massive risk to us. And I think, quite honestly, it's why we continue to talk about how important it is to have a balanced portfolio when it comes down to the property types. And, you know, I think people misunderstand that and misprice that. So, you know, we love the fact that we have the diversity in the different property types. You know, we still have you know, 75% of our centers or so have some sort of grocery component associated with them. But, you know, that's a good thing. And we don't see a massive risk of future consolidation. And then when you get into the other, you know, retailer types, you know, value, you know, the value players, etc. It's probably less of an issue than it is in the grocery space. But So far, not a huge issue to us in particular.
spk11: And Paulina, specifically, just to put some numbers around the Kroger-Albertson merger, we have 17 units. Ten of them are Kroger's. Seven are Albertson's. It represents about 1.9% of our ABR, so not a huge exposure there. And also, we did a three-mile study for overlap, which arguably in the grocery world is a larger radius than necessary. And we only have two overlaps. One in the Chicago area and one in the Dallas area. And the one in the Chicago area, it's already operating under the same flag. So they're already competing with each other. So we feel very good that this merger is going to be transparent to us. That's if the merger goes through. You may have seen the news this morning. A couple of the state attorney generals are now challenging the merger. So we'll see. They've got a little bit of work to do to get it done.
spk06: Yeah, it seems it will be a long, long process. A long slot, yeah. Yeah. And then the other question I have is, do you know of any Bed Bath and Beyond store closing in your portfolio?
spk14: Any Bed Baths closing? No, I mean, we obviously have some Bed Baths that have lease expirations. And so there's potential that upon those lease expirations, I think a couple of them in 23, two of them expire. So they may potentially close, but that's not unusual. But no, we don't know of any premature closings. And candidly, you know, we have very strong real estate there. The bed bath component of that company versus Bye Bye Baby, for example, the bed baths are generally lower rents. So it could be a very good opportunity for us.
spk04: But we have studied all of our stores other than the ones that go through the natural expirations. And if you take a look at our sales, the way our stores are positioned, we feel pretty confident in terms of where they are. We, of course, talk to Bed Bath & Beyond and their advisors consistently. So we're keeping a close eye, but we like our position in terms of the specific stores themselves.
spk06: Great. Thank you. Thank you.
spk05: Thank you. This concludes our Q&A session. I would now like to turn the conference back over to Mr. John Kite, Chairman and CEO, for closing remarks.
spk14: Well, I just want to thank everybody for joining us. See you soon at NARIT. Look forward to it.
spk05: This concludes today's conference call. Thank you for participating. You may now disconnect.
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