Kite Realty Group Trust

Good day and thank you for standing by. Welcome to the Q2 2023 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that this conference is being recorded. I would like to hand the conference over to your speaker today, Brian McCarthy. Please go ahead.

Thank you and good afternoon everyone. Welcome to Kite Realty Group's second quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer John Kite, President and Chief Operating Officer Tom McGowan, Executive Vice President and Chief Financial Officer, Keith Feer. 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.

All right. Good morning, everybody. Thanks a lot, Brian. During the second quarter, KRG delivered outstanding operational results, while continuing to fortify our best-in-class balance sheet. The demand for our high-quality space remains strong, and we are in a prime position to continue to drive pricing, improve our overall long-term growth profile, enhance tenancy, and further grow our revenue and cash flow. Turning to our results, we generated FFO per share of 51 cents beating consensus estimates by $0.03 per share. Our same property NOI growth for the quarter was 5.7% as compared to the same period in 2022. Our outperformance in the first half of the year is allowing us to increase our NARIT FFO guidance by $0.03 at the midpoint. We're also increasing our same property NOI growth assumption by 75 basis points moving from 2.75% to 3.5%. Keith will provide more details around our quarterly results and updated guidance. We signed 190 leases, representing over 1.3 million square feet, producing a sector-leading 14.8% blended cash spread on comparable new and renewal leases. Excluding the impact of option renewals, our blended cash spreads were 24%. More importantly, KRG earned a 32% return on capital for new leases. As I've emphasized previously, leasing existing space provides the best risk-adjusted return for our invested capital. While our ability to drive pricing on initial rents remains strong, we're taking this opportunity to redefine our long-term growth trajectory. Recognizing the favorable supply and demand dynamic in open-air retail, at the outset of the year, we focused our leasing efforts on implementing higher fixed rent bumps and CPI adjustments. I'm pleased to report that through the first half of 2023, we have been extremely successful with this initiative. 80% of our new and non-option renewal leases signed have fixed rent bumps that are greater than or equal to 3%, and 40% of those leases have CPI adjustments. The average annual fixed rent increases for new and non-optional renewals in the first half of 23 was 2.4%, including both our small shop and anchor tenants, which is 90 basis points higher than our portfolio average. We are laying a solid foundation to improve our long-term embedded growth profile. Based on the current tenant demand, I can't think of a better time for KRG to upgrade the merchandising mix at our centers. In a different leasing environment, the liquidation of Bed Bath could have been a real jolt to the sector. Instead, it's providing to be one of the best opportunities we've been afforded. I was adamant about maximizing this opportunity by prioritizing the best solution over the fastest solution. That said, I'm pleased to report that we are making great progress backfilling those boxes at higher rents with better tenants. The pool of tenants to backfill the attractively sized and well-located boxes is deep and diverse. Thus far, we're negotiating with 15 different brands across the retail spectrum, including grocery, sporting goods, big box wine and spirits, home furnishings, and off-price apparel. Heath will provide more detail on the current status, and we look forward to providing updates as we progress. Our success in enhancing the merchandising mix is not limited to the bed-bath spaces. Year-to-date, we have opened two grocery stores in the portfolio and have an additional four grocery stores in the sign-not-open pipeline. In addition to adding grocers to the portfolio, We also have several opportunities to add multifamily units to our mixed use and lifestyle portfolio. We currently have an ownership interest in nearly 1,700 apartment units and have entitlements for an additional 5,000 units. We look forward to further densifying our properties at healthy risk-adjusted returns and partnering with best-in-class operators when appropriate. The KRG team continues to capitalize upon the demand for open air retail and the resiliency of our cash flows. Our efforts to enhance our merchandising mix, drive pricing power, and increase our long-term embedded growth profile will undoubtedly increase the value of our open air centers. We have often talked about the optionality afforded to owners of high-quality real estate. That same optionality is exponentially increased when supported by unparalleled operational acumen and a best-in-class balance sheet with substantial liquidity. We're extremely well positioned to seize the opportunities that lie ahead. I want to take a minute to really thank our team for their continued dedication, outperformance, and commitment. I'll now turn over the call to Heath.

Good afternoon. I want to start by thanking our operational team for once again allowing me to share the good news. Quarter after quarter, it's been a privilege to report on your considerable accomplishments. KRG exceeded expectations by generating NAERI FFO per share of 51 cents during the second quarter and $1.02 year to date. The quarterly outperformance was primarily driven by higher than anticipated same property NOI, which grew by 5.7% during the second quarter and 6.1% year-to-date. During the second quarter, increased occupancy and rent escalators were the primary driver of our same property NOI growth with a 360 basis point increase in minimum rent and net recoveries, 140 basis point increase due to low or bad debt, and a 70 basis point increase in overage rent and other revenues. As John alluded to earlier, we are raising our NAREIT FFO per share guidance range to $1.96 to $2, representing a three-cent increase at the midpoint. Two pennies are attributable to a corresponding increase in the same property NOI growth assumption as a result of lower bad debt, payment of post-petition rent from Bed Bath & Beyond, and higher overage rent. The other penny is related to an unbudgeted termination fee. Our updated guidance incorporates the following assumptions regarding the back half of 2023. We are assuming no additional rent from Bed Bath & Beyond. Specifically, we expect the gross rent from Bed Bath locations to be two cents less than what we collected during the first half of the year. We are prudently assuming bad debt to be 125 basis points of revenues for the balance of 2023, which, when combined with the actual bad debt experienced in the first half of 2023, equates to 85 basis points of revenues for the full year. We are anticipating a deceleration of fee income as the first phase of Hamilton Crossing project nears completion. We are not modeling any additional termination fees. And while we sold two assets in the quarter, we anticipate the impact of transactional activity will be essentially neutral to earnings as the blended cap rate on the transactions is well below the interest income offset. Our balance sheet continues to be in an enviable position with net debt to EBITDA of five times, debt service coverage ratio of 5.3 times, 97% of our NOIs unencumbered, over $1.2 billion in liquidity, an undrawn revolver, minimal floating rate debt, a well-staggered maturity schedule, and multiple capital sources. These metrics allow our team to remain intently focused on operational excellence and provide us with the flexibility to immediately pivot and capitalize should a compelling opportunity arise. We have only $95 million of debt maturities remaining in 2023, which we'll satisfy with cash on hand and proceeds from our line. As for the $270 million coming due in 2024, we continue to remain opportunistic as it relates to the unsecured debt markets. The good news is that our indicative spreads have materially tightened recently, which further verifies our patient approach. Before turning the call over to Q&A, I want to take a moment to further elaborate on the progress we're making with the backfill in the Bed Bath & Beyond spaces. We ended the first quarter with 22 units representing 1.4% of ABR and 522,000 square feet of GLA. Thus far, three units were acquired in the bankruptcy auction, six units are either leased or under assigned LOI, and 11 units are in LOI negotiation. As John mentioned, enhancing our merchandising mix with 15 different brands Generating strong spreads and returns on capital and further bolstering the durability of our cash flows is a tremendous opportunity for KRG. Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again.

We'll pause for a moment while we compile our Q&A roster. Our first question comes from Todd Toms with KeyBank Capital Markets.

Your line is open.

Yeah, hi. Good afternoon. John, first question, you opened up by commenting that you're working to drive an increase in the long-term growth of the portfolio and talked about some of the success that you've realized this year. I'm just curious what you think the impact of some of those initiatives you know, are having on the stabilized growth of the portfolio today? You know, maybe at full occupancy, if you think about it that way, and how that compares to maybe five or ten years ago. And then is there a target that you're working to achieve in terms of that long-term growth rate for the portfolio, either, you know, in terms of the escalators or otherwise? And, you know, when do you think you might achieve that?

Well, I think, I mean, as you know, Todd, it takes time for that to work through the portfolio. But I mean, there's no question that the embedded rent growth that we're achieving in 2023, as I mentioned very specifically, is significantly above where the portfolio average was, almost 100 basis points. And I hope you caught when I was talking about it in terms of what we've achieved this year, we were including both the anchor and small shop space. But the reality of that is that you know, the ability to really drive that growth and have it come to fruition more quickly is going to be in the shop space because of the quicker turns and the better ability to get, you know, those 3% and 4% annual bumps. And then, candidly, the CPI adjustment is an insurance policy that we've also added to that. And that used to be fairly, when I say used to be, a long time ago, that was a very typical part of the business. And over the last, say, God, 10 years, there wasn't a lot of talk about that. And we set it out in the beginning of the year. I mean, we set goals in the beginning of the year, and that was absolutely one of the goals, and our team delivered it. And so you know, without getting extremely specific and giving modeling, you know, information, I mean, it's going to help. There's no question. And more importantly, it's a function of the interest in open air retail. All right. So you can break down a lot of different things. But when you look at our non-option renewal spreads, okay, and you look at this part of our business that we're able to now function, you know, now pull in these annual bumps of 4% or 3% with a CPI adjustment, that tells you the business is extremely healthy. And I know there's a lot of talk out there about, you know, how is the health of the business? The health of business is very strong. And for us in particular, it's very strong.

Okay. Are you having success driving annual escalators with tenants, you know, with anchors maybe in certain categories and with certain credits that have historically been pushed back on escalators? You know, are you seeing those changes or, you know, realizing that there?

I'll comment and I'll have Tom jump in. I mean, from my perspective, absolutely, we're having success having those conversations. That being said, I mean, the anchor side of the business is more difficult to, you know, to get that done. So, you know, historically, would we be happy with, you know, a 10% increase after five years in an anchor deal? That would be pretty typical. Now we're trying to push that a little further. So it's, you know, not as readily available because of the way the turnover happens. We just have less turnover there. But, Tom, you want to comment too? Yeah, I think we have to take a look at this in steps.

And we're in the early stages of trying to educate and work with larger box tenants. And instead of no bumps and five, maybe we take a look at a shorter term of three, and then we start the bumps. So we're using different tools to get to the same place, but it will take us longer. But we're very much focused on not only the small shop, but the anchors as well. And as long as we have this focus, as long as the team is ready to go, we expect to make nice advances.

Okay. And then, Heath, you know, a question for you. The portfolio's lease rate decreased 70 basis points versus last quarter, but build occupancy was unchanged at 92.3%. Can you speak to that? in light of the bed bath boxes that you recaptured during the quarter and also maybe provide a little bit of detail around the expected trends for the portfolios leased and economic occupancy rates moving into the second half of the year?

Sure. So, Todd, as you know, the lease rate is basically a point of time at the end of the quarter. So you're looking at that day and you're saying this is how much is leased. whereas your economic occupancy represents your average occupancy during the quarter. So the full impact of the bed bath is running through your leased rate, but it's not running through your economic occupancy. That's why you also saw a compression on your spread between your leased and occupancy. So as we move into the back half of the year, you'll see the occupancy start to track the leased in terms of its fallout from the bed bath. So that explains why that delta happened. That explains why we're flat in the occupancy But we're having a more decline in the leased rate. In terms of the trajectory, you know, Todd, as of the first half, we only had eight of the bed baths were out of our occupancy and leased numbers. We're going to add an additional 14 to that going into the third quarter. So you're going to see our leased and occupancy rates sort of trough into the third quarter. So putting some numbers around it, it's about 120 basis points just bed bath alone. So, again, you'll see that drop. And then over the course of time, as we start to sign up those Bed Bath & Beyond leases, you're going to see, number one, our S&O grow, and you'll also see that spread between lease and occupied grow as well. So that's kind of how to think about the balance of the year.

Okay, that's helpful. All right, thank you.

Thanks. One moment for our next question. Our next question comes from Craig Mailman with Citi. Your line is open.

Hey, guys. Heath, maybe just to follow up on Todd's last question on occupancy, as we think about kind of isolating the bed bath, which you did 120 basis points, but then factoring in the commencement of the S&O pipeline. I mean, how much of that would offset kind of this drag from bed bath kind of hitting the numbers in the second half?

Yeah, so Craig, we don't guide to occupancy at the year end, so that's kind of where you're going with this. So I would tell you that I don't think the, you know, the lease rate's not going to move because obviously those are already signed. In terms of the economic occupancy, I don't think it's going to catch up to the full 120 from the bed bath. So I think we'll be ending the year probably at a spot that's lower than where we started the year. But that's really as much direction as I can give you because, again, you know, 120 basis points obviously is a lot of movement to be happening in a single quarter.

Okay, that's helpful. And then, John, I know you said over the past two quarters here it's more about maximizing rate rather than speed to lease up on the bed bath, but it sounds like you guys have really good traction. I mean, from a, you know, commencement perspective, maybe relative to where you thought two quarters ago, kind of what do you think updated timing is given, you know, how much you have under LOI and then the other 11 that are kind of in negotiations. What do you think the timeframe is to get that revenue back up and running and then maybe also just run through how much of those are single-tenant backfields versus maybe splitting the boxes?

Yeah, I mean, I don't think that the overall trajectory has changed much, Craig, in the sense that, you know, what we've experienced over the last several years, I mean, we've done, what, 60-something boxes over the last few years. You know, generally speaking, when you sign a lease, it's going to take 12 to 18 months for rent commencement, and it's going to depend on how much work you're doing in that space. So I know some people say it happens faster than that, but those are rare. It has to be an as-is deal and not a lot going on in terms of work. So I think we're still on that trajectory of as the leases get signed, it's approximately in that 12-month period. And then I would say in terms of splits, Right now, the majority of the conversations, as they have been for the last two, you know, say four quarters, are, you know, tenants wanting to take the entire space or us requiring them to take the entire space, more importantly. Now, a couple instances where, you know, we may want to subdivide for merchandising mix, and that's kind of what I meant by this is not a speed game. Um, you know, and so, but the splits are pretty rare. I mean, of the 63 deals we've done in the last, you know, whatever, a couple of years, uh, we split one, which is kind of unbelievable. And it goes back to the theme. Open air is strong.

Okay. Um, and then you guys got leveraged down to five times. I mean, from a long-term perspective, um, Kind of what's the goal here? How much capital do you kind of keep dry here for potential opportunities? Kind of thoughts on balance sheet management.

Sure. Yeah, I mean, if Heath wants to talk about this, too, it's good. But, you know, from my personal perspective, you know, we're at five times. You know, that's going to ebb and flow, you know, quarter to quarter a little bit, but not materially. Um, so we're at the low end of our range that we've set out as a goal, um, which is pretty fabulous. Uh, you know, we've, we've delivered basically a turn and a half since the merger. Um, you know, that's another beautiful benefit of the fabulous deal that was done. And, you know, so we're, you know, we wanted to make the point that our balance sheet is, is, you know, one of the top two in the entire sector. And that affords us this ability to continue to operate at a very high level. But also, you know, if an opportunity arises, then we're one of the few that probably can act upon that without any material, you know, issues with our balance sheet. So we love where the balance sheet is. It's a very strong position. And, you know, we want to continue to be, you know, in the low to mid fives, like we've been saying. And again, that affords us You know, lots of optionality.

Keith, you want to? Nothing there. Okay. Great answer.

Keith, did you want to add anything?

No, nothing there. Thanks. I took the words out of his mouth.

The balance sheet's in great shape. Lots of liquidity. One quick one. Keith, is there anything legacy RPI related on swaps, amortization that's running through the numbers and If there is, kind of how long does that, what's the tail on that until that burns off?

I'd have to look at our maturity schedule and figure out which one of the RPAI debt instruments are swapped and how long they run through. So I think it's nothing material running through it. I will tell you the one thing that's continuing to run through the P&L that's a swap, as you recall, in 2021, we took out that forward. That was $150 million. That's resulting in about a $3 million benefit every year to our interest expense. One thing about it, it's a little lumpy, so you may have noticed there's a sequential sort of increase in interest expense from the first quarter to the second quarter, because when we realized that $3 million, we realized half of it in the first quarter and half of it in the third quarter. So it gets a little lumpy, but nothing occult with those swaps that you're thinking about, Craig. And again, we can offline take a look at when those things exactly mature if you want me to quantify that for you further.

No, that's helpful. Is there anything to call out sequentially on interest expense from 2Q to 3Q?

Again, other than in 3Q, you're going to see the benefit of that $1.5 million again. And then, you know, obviously there's a slight increase in SOFR based on recent moves by the Fed. So to the extent that we have a floating rate debt, you'll see a small uptick, but nothing material quarter over quarter.

Great.

Thanks, everyone. One more before our next question.

Our next question comes from Floris Van Dishcombe with Compass Points. Your line is open.

Hey, guys. Thanks for taking my question. I guess let me start with, as you, John, I mean, you sort of mentioned this in some of your comments as well, you know, raising the long-term growth rate of the portfolio. Part of that, obviously, is through higher fixed rent bumps on the shop space and also how you change the anchor bumps going forward. I think one of the other things that is, you know, oftentimes overlooked is, um, your, uh, your move to a fixed cam was probably one of the earliest in the shopping center space. And, um, you know, we've seen this play out 20 years ago, 25 years ago in the mall space where Simon and GGP were the sort of the impact. I think GGP was the first one to do it, but Simon followed shortly thereafter. in terms of going to fixed cam and Simon has stopped disclosing because the profit margins are so large on that part of the business. Maybe could you give us a little bit of an update on how fixed cam is going? What percentage of your portfolio is that? And what kind of bumps are you getting in terms of escalators and how you see that enhancing your growth going forward?

Sure. And I guess he brought the fixed-cam initiative from GGP, so we're thankful. But the reality is we're doing very well there. We've gotten back much quicker than we thought. When we did the merger, we were around 50% of the portfolio was fixed-cam, and we're already back at 50% for the total portfolio. And as you know, RPAI had almost no fixed CAM at all. So it's quite amazing how quickly we've gotten back, which shows you that our conversion ratio, you know, is in the 90% range. So, look, the initiative is great. I guess it's not for everybody. But for us, it's been a really smart thing for us to do. When you look at our ratios, you look at our NOI margin, things like that, I think that's where it shows up. And obviously, it has escalators. We don't disclose those escalators because that's a competitive thing. But the reality is they're probably higher than those base rent escalators. So I think, look, Floris, in this business with the way rollover works and the time associated with, you know, that coming online, this is all adding. But when you, you know, in all the deals we've done this year, right, and as I said on my prepared remarks, we're almost 100 basis points better than, you know, historical portfolio, right? So that just shows you that this is a movement in the right direction and I do think that it's, you know, a lot of it is how we run the business, but it's also a function of the strength of the platform in terms of open air retail. And you've just got so many more retailers that are coming into the space. It drives that friction. So suffice to say, I do think it is a big part of what we're doing. You know, obviously, reimbursements is a smaller percentage of our revenue, but it's a material percentage.

And then maybe as a follow-up, you sold one of your potential mixed-use development sites at Pan Am, I think at almost a zero or very low cap rate, obviously. Could you maybe update us on your thinking on some of these other mixed use sites in particular? Maybe give us an update on what's happening in Ontario, California with the former cinema box there. And then I think you extended the cinema short term, but how is the entitlement process going and what are you thinking there? And then maybe has your thought process changed on what's gonna happen at Carillon going forward, the fact that there's very little new developments and, you know, are there elements of that, particularly in terms of retail, that you might be interested in?

Let me just give you a second, then I'm going to have Tom give you the details, but in terms of Carillon, specifically, you know, we've been pretty clear that when we laid out our strategy on the developments, the future developments, that, you know, we kind of looked at that quite differently than we did one Loudon, for example, and that hasn't changed. You know, I think Carillon's great and it's a great piece of real estate, but for us in terms of investing a lot of new capital, we're not looking to do that. We're looking to minimize the investment there and maximize the investment in One Loudon. So thematically, that theme hasn't changed, but I'll let Tom give you more details. Yes.

Then on Pan Am and specifically, that was a deal that we ended up selling the property to the city of Indianapolis. There was no question that the highest and best use for that property was a convention center expansion and a large hotel. So that part was very straightforward and easy for us. Then on Ontario, east of L.A., we have a great 19-acre parcel. So we are in the process of working with the city and working on various concepts of repurposing that property from a zoning standpoint. So that is moving along nicely. So on all these, including Caroline, we're just taking a very measured approach, doing the right thing, not forcing projects or developments that don't make sense based upon the time periods of which we're in.

Did you want me to go ahead and move on to the next question? Yes, please.

Sure. Thanks, Flores. One moment.

Our next question comes from Alexander Goldfarb with Piper Stanley. Your line is open.

Hey, good afternoon out there. So two questions. Heath, you know, your bad debt assumptions, I think you guys were pretty low in the first half. I think it was 45 bps or something like that. It was pretty low. Back half, you're budgeting 125. You already know about, you know, Bed Bath and Party City, AMC, all the known ones. So my question is really, you know, and you're not alone. A number of the peers are being cautious on bad debt. Are there truly concerning tenants out there, or is this just sort of you and other teams just trying to be Alex Sarkissian, conservative to based on historic like just trying to get a sense, because it doesn't seem like from the headlines that you know they're big tenants that are pending out there, but maybe there's stuff that's bubbling below the surface that we don't know about so just looking for a bit more perspective.

Alex Sarkissian, Now Alex I think the 125 basis point assumption is really rooted in history, looking back, you know typically we run between 75. and 100 basis points of revenues as a typical year of bad debt, and then laying on top of it that we're in a strange environment, and there's no question that the economy and the macro environment is full of uncertainties. So there isn't this occult list I have in my pocket, Alex, where I'm saying, well, I better make sure I have enough bad debt to cover in case X, Y, and Z falls out. So there's nothing specific. It's just us saying, okay, let's assume it's going to be close to what we see historical, plus let's add a little extra because the environment is strange. So That's really it, so there's no magic to it.

Okay, and then the second question is, on the apartment front, just maybe a bit more color, especially as the environment steadily improves, and maybe we can get back to some sort of transaction normalcy. Are you guys, the apartment initiative, is this like converting parking fields? Is this like behind shopping centers? Is this adding second or third floors? Or are you guys buying adjacent land to existing centers to put apartments, just a bit more perspective. And I think John, you said you would bring JV partners to, you know, sort of run these deals and help do everything. So just a bit more color.

Sure. Yeah. I mean, I think it was everything except the last, the last bullet. We're not, we're not like actively out looking for land, um, adjacent, uh, to acquire generally speaking, we already own the land. So yes, I mean, we've done a little bit of everything that you mentioned there, Alex. And it's been interesting because, you know, sometimes we have contributed a parking lot and taken a, you know, say a 15% equity interest vis-a-vis the value of the land. And then sometimes we've contributed capital. It's a little bit of everything, but we have generally not looked to do it solely ourselves. Obviously, we have been learning the business over the last several years pretty significantly. That said, I think at this point we believe having some sort of operating partner, depending on what percentage they might own, is really going to be dependent on the deal. But the point we're making is that this potential stream of revenue is growing, and we own the kind of quality real estate where people want to add multifamily. So it's a nice complement to the primary business. It generally has a higher growth profile. But again, we're going to be very measured in how we go about it as we have been to date. But the reason I mentioned it is probably a lot of people don't really think of that, that we've already amassed an equity interest or ownership interest in almost 2,000 units. And we have 5,000 units that are entitled. I mean, so we have a substantial kind of ability to continue to grow that part of the business. but we'll do it in a measured way. By the way, that's why our leverage is five times, right? We're measured, we're thoughtful.

And then John, but to that point, the 1700 units, those are, are those all operating right now? Or those are what you have under control that you could build?

Yeah, no, no, no, I'm sorry. Those are operating. Um, and then we have a, how many of those are under construction?

Yeah, so we basically have four or five opportunities that are out there. And one number that you may have gotten confused with is just at one Loudon, we have 1,745 units through the zoning process that we would be able to develop. So if you look at what we have under construction right now, it is the corner project. But it's 285 multifamily units, and the first occupancy of that will begin just towards the end of this year. But there's an inventory of opportunities for us. We'll be very measured. We'll make determination when the right times are. But it's good to have that entitled land inside our future opportunity list. Thank you.

One moment for our next question. Our next question comes from Anthony Powell with Barclays. Your line is open.

Hi, good afternoon. You put a new slide in your deck with delivery to the flagpole versus the total lease rate, which is very positive for you. That said, it suggests to me that at some point people will want to put more money into the space and actually construct new retail centers. So how far are we away from that? Is there a risk that in the next new easier money time that we have that people will start to build more retail centers given the strong economics and results we see.

Anthony, hi, this is Heath. I'll start and let John add on later. So I still think the environment is such that we're going to be in a continued Low supply environment or low new supply environment. I mean, really, if you look at what construction costs are versus what you can buy an existing center for, especially an existing center where you may have some redevelopment plan where you can maybe even get it below replacement cost value. So I think structurally, things are still looking good for us in terms of what new supply is going to look like. on a go-forward basis, and we're certainly not looking for raw parcels to do any greenfield construction ourselves. Obviously, we've got a lot of wood to chop on our existing projects for densification and multi-use or redevelopment of some of our projects as well. So again, us personally, it's not one of our sort of capital allocation levers we plan on pulling. And I think everyone else is looking at it the same way. I think economically, it's probably better to acquire at this point than it is to build new supply. But I'll let John.

No, I mean, he said it perfectly, Anthony. I just don't think that there is enough yield in a ground-up deal. And you also have to remember, a ground-up deal generally would take you three years minimum to get to revenue. I mean, probably five if you're really getting into finding the land and going through the entitlement process on stuff where you'd want to own it. So, I mean, it's one of many reasons, but at this point, it just does not feel like there's a push towards new development. And candidly, we're still working through an overbuild from the previous decade, right? So as you work through that overbuild, it becomes, this is why it's a better business today. I mean, there's 100 reasons why, but this is one of the very, very strong primary reasons is a better business. And I don't see that changing at any time. And when you look at the deals that we do occasionally, we generally already own the land and our returns are well above what we would be otherwise getting. That's why we do the deals, you know, landing a tradition is example of that.

Got it. Thanks. And, uh, going on to other capital allocation, you know, some of your peers have either announced deals or room to announce deals. There's what's talking about seeing new deals come back to them this morning. What are you seeing out there? I mean, I know that your priority is leasing, but any, any potential you start to ramp up the, uh, the acquisition pipeline given the environment?

No, I mean, I think that the acquisition environment is still tepid. That being said, there's no question that there appears to be, you know, maybe even in the last six weeks, more product coming to market. It continues to come to market as individual centers. I haven't, you know, there's a couple larger portfolios that would have been no interest to us. So we're actively involved in reviewing opportunities. As I mentioned, we have one of the top two balance sheets in the entire sector. So if we want to do something, we can. But we're very, very selective right now. We have plenty to do. And so I think, I don't know about in terms of things coming back to market. I mean, I guess if deals were pulled at some point in time, they're probably coming back around. It's just new packaging. It's the same deal, right? So for us, we're really more focused on, you know, if we're doing acquisitions, we're generally pairing that trade with a disposition. So, you know, right now that's kind of where we are, which is why he said we're looking at that impact to be neutral. But again, we're early. I mean, it's, you know, we have a whole nother half a year. A lot can happen. Thank you.

Thank you. Thanks, Anthony. One moment for our next question. Our next question comes from Lizzie Doerker with Bank of America. Your line is open.

Hi, everyone. Apologies if I missed it. I just wanted to see if you could give more color on the decline in small shop occupancy. It seems to drop a bit more than the dip we saw even last quarter.

Sure. I mean, it's pretty simple. It's really the majority of it. I mean, there's a small part of it. I think it was Jenny Craig who But really, the majority is actually us accelerating recapturing space, probably 75% of the drop, where we had an opportunity to move tenants out if they're in default. And in this kind of environment where we're getting the annual rent bumps that we're getting and the quality of tenants we're getting, I think we're moving very quickly to enact that pricing power. So There's really, that's really it. I mean, it's really more something that we want and we will continue to want to get our hands on.

I'll just add, if you recall, you know, our small shop lease trade was the highest in the sector at 92.5%. So really where we're sitting now, we're just viewing this as a tremendous opportunity. As John said, Before, you know, we've got leases and it takes a long time to effectuate change. So if we can recapture faster and get a better tenant with better rent in, we're going to do it. So that's what's happening.

Yeah, that 92.5 was, you know, pre-COVID. And so there's no reason to believe we won't march back to that, but it obviously takes time. But I think the more important thing here is the theme is if we can get space, we want space. That's the theme.

OK, thanks. That's helpful. And then I noticed you have a good outlay on page 15 of the deck on just your anchor inventory opportunity. And I just was curious on the 17% spread that's expected on what's left. And just compared with the 26% spread that's been executed, Is the lower percentage there just a function of what's been executed last quarter, or is there anything to comment on there in terms of the expectations around rent growth?

No, this is certainly not a sign that we're decelerating a simple math. It's just basically taking our average in-place rents. and calculating the spread that way. As you can see, we're trying to be conservative and saying, well, if we at least got our average rents in place, we'd have a 17% spread. Obviously, with the column to the left, you can see that we're doing much better than that. So we anticipate being able to outperform that, but for this presentation here, we're trying to be conservative, and you'll see footnote four will give you an explanation of that number.

Our leasing team asked the exact same question. Why isn't that lower? Sorry. We don't expect that to be the case.

Okay, thanks, everyone.

One moment for our next question.

Our next question comes from Michael Mueller with J.P. Morgan. Your line is open.

Yeah, hi. Just two quick ones. First of all, when you talked about the 2.4% bumps on Q2 activity, Was that all in or was that just excluding option renewals? And then the second question is, are you just seeing any demand differences when it comes to the various product types like lifestyle versus community neighborhood or geography?

Yeah, first of all, it excludes options. So that's new leases. I'm sorry, Mike, what was the second part?

Yeah, just any demand differences you're seeing across the product types, basically.

You know, really, I mean, that's one of the benefits of our portfolio and the different product types that we have. There's been such cross-pollinization of retailers wanting to be in these kind of three major food groups as we broke out in the investor deck, you know, community, neighborhood, mixed-use, lifestyle, and power. So and there has really been no real, you know, differential there. And from a geography perspective, I mean, the geographies that we're in are very strong. So we're benefiting from that. I mean, as you know, 40 percent of our almost 40 percent of our revenue comes from Texas and Florida, which I think is the highest in the space of those two states. So that has afforded us a lot of opportunities because those are two very important growing markets for retailers. But by the same token, I mean, it's very broad based. And I think we made the point in the remarks that when you get to this kind of friction point when supply has dropped so much over the last few years and demand has gone up a lot, I mean, that's what's driving that increase. Got it. Okay.

Thank you.

Thank you. Thanks, Mike. One moment for our next question. Our next question comes from Lisa Sy with Jefferies. Your line is open.

Hi. It's Linda. In terms of success in achieving fixed rent bumps, it sounds like those tenants are comfortable with their occupancy cost ratios. You know, how do you think about the opportunity to increase occupancy cost ratios and which tenant types have better capacity when you look at your portfolio composition?

Sure, Linda. Very good question. I think that's, again, back to my theme on open air. I mean, one of the beauties of this platform is that the occupancy cost is low on a relative basis. you know, when you're comparing to other types of retail and especially when you're comparing to online only, you know, the acquisition cost of the customers is crazy. So I think the drive here is that, you know, when you look at the total portfolio, we've historically been, you know, high single digit occupancy costs kind of, and you compare that to high teens. I mean, you can see that In other platforms, you can see that that is a real driver in their ability to continue to pay rent bumps. But by the same token, we have to make great selections about who the retailers are, which is why we mentioned that it's never a foot race. You're always looking to thread that needle between the merchandising mix, the retailer's ability to perform, and the cost to occupy. So right now, we're in a very good sweet spot as it relates to all those.

And we'll see some fluctuations simply through geographics of different areas that have higher wage scales and maybe a little more difficult supply chain concept. But I think all in all, we're doing a very good job watching that ratio, wanting our customer to be as healthy as possible. So it's a big focus around here.

Are there certain tenant types that have better capacity or does it relate back to kind of just wage gains and sales of a particular region?

Yeah, no, I don't think you can really pick a particular type of retailer. It comes down to the individual store and how it performs, and they can be very different across even the same brand, right? This is why real estate is so important. I mean, you've heard us talk so many times about, you know, we focus on the dirt. We focus on the quality of the real estate. What's on top of it is fungible. So, you know, as long as we own very high quality real estate, then we should be able to produce, you know, or I should say our customers should be able to produce results that allow it to continue to prosper and for us to prosper. I And we're pretty good at managing that partnership.

And then in terms of payback periods on anchors and small shops, given the demand for space and some commodity costs coming down, do you expect payback periods to shorten?

I mean, yes, we're seeing them shortened in general. And they generally are less than three years, you know, when you look at the total portfolio. but it really depends on the individual deal, Linda, as you know. And that's why we focus on return on capital a lot more than spreads, even though we're getting great spreads and we talk about it, especially when you look at our gap spreads, right? And that's where our rent growth comes into play. But bottom line is, our job is to be very good fiduciaries with our you know, investor capital. And so we're much more focused on getting that, you know, those high returns, which we've been doing.

Thanks.

Thank you.

One moment for our next question. Our next question comes from Dori Keston with Wells Fargo. Your line is open.

Thanks. Good morning. How do you expect CapEx spend to trend over the next 12 to 18 months, including and excluding the cost to get the old bed bath spaces back online?

Excluding the cost to get bed bath spaces done, over the next 18 months, it's upwards of $200 million. And so if you look at the total of bed bath inventory and what that might cost, it's probably somewhere in the neighborhood of between $40 million and $50 million additional. to get those leased up as well. And you'll see that spend probably later part of 24 into 25. So again, we've got significant capex spend. We've got a significant sign-out open pipeline. So it's going to be elevated over the next, call it two years.

But we do see construction costs in general stabilizing. And I think we'll be able to see some more movement in that as general contractors, construction managers, begin to start pushing some of those savings down. So, we feel like we're in a much more stable area as we tackle some of these costs.

Okay. Thank you.

One moment for our next question. Our next question comes from Wesley Galladay with Bayard. Your line is open.

Hey, everyone. I'm just curious which markets have the best pricing power and is there any region that is materially separating?

Hey, Wes, we were talking about that a bit earlier. Right now, it's pretty well balanced and there is not one market that we see that is way outpacing another in terms of pricing power. I mean, obviously, some markets have higher embedded rent than others just because of the history of the market, you know, like in the New York region, for example. But in terms of growth, it's very, our ability to drive annual growth is widespread. And look, there's been a significant suburbanization over the last couple of years, and we've been a big beneficiary of that. And that appears to be pretty solid, like not fading. But that said, also, when you look at our gateway markets like Seattle or, as I said, New York, Chicago, et cetera, those are growing as well. So there's a pretty strong bid out there for this type of retail. It's just pretty basic.

Okay, and then I think earlier in the prepared remarks, you mentioned the fees would step down for Hamilton Crossing or fees because you stopped the development at Hamilton Crossing. Can you quantify that? And then as we look to next year, is there anything noticeable when it comes to like a mark-to-market debt amortization for interest expense?

Yeah, so the first part, the deceleration of the fees, it's about a million dollars back half of the year, less than it was in the first half of the year. So again, that project, the first phase of Hamilton Crossing is winding down, so those fees are going to be ending soon. However, there is a potential for future phases there, so you may see some more development fees turn on maybe before the end of the year and into 24. So hopefully that'll be something that we can repeat going to 24. And then in terms of the, what was the second part of your question? Was it the debt amortization? Yeah, the market gain. Yeah, and the market gains will probably see a decline of, I don't know, call it two pennies, around $4 million into 2024 as those maturities hit.

Okay, thanks for that.

One moment for our next question. Our next question comes from Paulina Rojas with Green Street. Your line is open.

Hello, everyone. So we have long heard about mall tenants looking to migrate to the open-air space, some of them. And you also highlighted in your presentation two questions. Is this migration mainly taking place at your lifestyle centers or you're also seeing it across other subproperty types? The second one is, have you seen this trend accelerate, or is it progressing at a steady pace?

Hey, Pauline, so macro, and Tom should comment, obviously, but macro, this trend, I don't know if trend is the right word. I mean, it's really just the fact that there's less retail space, the open-air retail space segment is very cost effective. So you're finding retailers, you know, really not delineate as much as they once did in these different product types. So I do think thematically it's important to understand. I think it's more than a trend. I just think it's the business. The business has changed. And these retailers have realized, again, and Tom can give detail, the retailers have realized Their profitability in the open-air sector is significant, and that's why they want to grow the platform quickly. But Tom can give you a little more detail.

Yeah, Pauline, I think it really comes down to one major factor, and that is convenience. And I think as people become more and more busy in their lives with the various things that pull on them, the convenience is critical that you can pull up to an open-air shopping center, get out of your car, and immediately ingress into a store and then cross-shop as well. And then, you know, in addition to that, you are able to get shops open. maybe two or three times a week, where if you were in an enclosed situation, that may be just one event a week. And then with our expense structure, these numbers start to overwhelm some of these retailers saying, we have to diversify. This doesn't mean that they're leaving their primary A locations and shopping center. It just means they need to touch a different shopper in a more convenient atmosphere. So we are seeing great strength. And like John said, this is just an evolution that is very consistent. And we're even seeing you know, some groups like maybe a Sephora that's even leaning out maybe beyond a higher open-air shopping center into more of a power or more productive center like that. So I think we'll see these tentacles continue to expand over the next couple years, which has obviously been a big help to the open-air industry.

Thank you. That's helpful. And another short one. Other income has been a positive, forcing property in high growth. I believe this is capturing the overage rent you mentioned. Can you touch on what retailer categories are driving this growth, and if you expect the full-year contribution to be in line with what we see year-to-date?

We're seeing that overage rent over a broad array of tenants, so it's not really... one particular tenant type. We have tenants that are paying us percentage rent that never paid us percentage rent at all. We have a furniture retailer that is paying us just an amount of overdraft we never thought was possible. So it's really been extremely broad. It's restaurants, it's the discounters, grocery stores. So you name it, we're seeing it everywhere. And we're experiencing the highest levels. We're even seeing it in theaters. We're experiencing the highest level of overdraft we've ever experienced in the company. you know, we expect that trend to continue.

And I'm not showing any further questions at this time. I'd like to turn the call back over to John Kite for any closing remarks.

Well, I just wanted to say again, thank you all for taking the time to join us today. And thank you for having an interest in KRG. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day. you Thank you. Thank you. Thank you. Good day and thank you for standing by. Welcome to the Q2 2023 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are on 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 need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that this conference is being recorded. I would like to hand the conference over to your speaker today, Brad McCarthy. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Kite Realty Group's second quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer John Kite, President and Chief Operating Officer Tom McGowan, Executive Vice President and Chief Financial Officer Heath Feer, 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.

All right, good morning, everybody. Thanks a lot, Brian. During the second quarter, KRG delivered outstanding operational results while continuing to fortify our best in class balance sheet. The demand for our high quality space remains strong, and we are in a prime position to continue to drive pricing, improve our overall long term growth profile, enhance tenancy, and further grow our revenue and cash flow. Turning to our results, we generated FFO per share of 51 cents, beating consensus estimates by 3 cents per share. Our same property NOI growth for the quarter was 5.7% as compared to the same period in 2022. Our outperformance in the first half of the year is allowing us to increase our NARIT FFO guidance by 3 cents at the midpoint. We're also increasing our same property NOI growth assumption by 75 basis points, moving from 2.75% to 3.5%. Keith will provide more details around our quarterly results and updated guidance. We signed 190 leases representing over 1.3 million square feet, producing a sector leading 14.8% blended cash spread on comparable new and renewal leases. Excluding the impact of option renewals, our blended cash spreads were 24%. More importantly, KRG earned a 32% return on capital for new leases. As I've emphasized previously, leasing existing space provides the best risk-adjusted return for our invested capital. While our ability to drive pricing on initial rents remains strong, we're taking this opportunity to redefine our long-term growth trajectory. Recognizing the favorable supply and demand dynamic in open-air retail, at the outset of the year, we focused our leasing efforts on implementing higher fixed rent bumps and CPI adjustments. I'm pleased to report that through the first half of 2023, we have been extremely successful with this initiative. 80% of our new and non-option renewal leases signed have fixed rent bumps that are greater than or equal to 3%, and 40% of those leases have CPI adjustments. The average annual fixed rent increases for new and non-option renewals in the first half of 23 was 2.4%, including both our small shop and anchor tenants. which is 90 basis points higher than our portfolio average. We are laying a solid foundation to improve our long-term embedded growth profile. Based on the current tenant demand, I can't think of a better time for KRG to upgrade the merchandising mix at our centers. In a different leasing environment, the liquidation of Bed Bath could have been a real jolt to the sector. Instead, it's providing to be one of the best opportunities we've been afforded. I was adamant about maximizing this opportunity by prioritizing the best solution over the fastest solution. That said, I'm pleased to report that we are making great progress backfilling those boxes at higher rents with better tenants. The pool of tenants to backfill the attractively sized and well-located boxes is deep and diverse. Thus far, we're negotiating with 15 different brands across the retail spectrum, including grocery, sporting goods, big box wine and spirits, home furnishings, and off-price apparel. Heath will provide more detail on the current status, and we look forward to providing updates as we progress. Our success in enhancing the merchandising mix is not limited to the bed-bath spaces. Year-to-date, we have opened two grocery stores in the portfolio and have an additional four grocery stores in the sign-not-open pipeline. In addition to adding grocers to the portfolio, We also have several opportunities to add multifamily units to our mixed use and lifestyle portfolio. We currently have an ownership interest in nearly 1,700 apartment units and have entitlements for an additional 5,000 units. We look forward to further densifying our properties at healthy risk-adjusted returns and partnering with best-in-class operators when appropriate. The KRG team continues to capitalize upon the demand for open air retail and the resiliency of our cash flows. Our efforts to enhance our merchandising mix, drive pricing power, and increase our long-term embedded growth profile will undoubtedly increase the value of our open air centers. We have often talked about the optionality afforded to owners of high-quality real estate. That same optionality is exponentially increased when supported by unparalleled operational acumen and a best-in-class balance sheet with substantial liquidity. We're extremely well positioned to seize the opportunities that lie ahead. I want to take a minute to really thank our team for their continued dedication, outperformance, and commitment. I'll now turn over the call to Heath.

Good afternoon. I want to start by thanking our operational team for once again allowing me to share the good news. Quarter after quarter, it's been a privilege to report on your considerable accomplishments. KRG exceeded expectations by generating NAREIT FFO per share of 51 cents during the second quarter and $1.02 year to date. The quarterly outperformance was primarily driven by higher than anticipated same property NOI, which grew by 5.7% during the second quarter and 6.1% year-to-date. During the second quarter, increased occupancy and rent escalators were the primary driver of our same property NOI growth with a 360 basis point increase in minimum rent and net recoveries, 140 basis point increase due to low or bad debt, and a 70 basis point increase in overage rent and other revenues. As John alluded to earlier, we are raising our NAREIT FFO per share guidance range to $1.96 to $2, representing a three-cent increase at the midpoint. Two pennies are attributable to a corresponding increase in the same property NOI growth assumption as a result of lower bad debt, payment of post-petition rent from Bed Bath & Beyond, and higher overage rent. The other penny is related to an unbudgeted termination fee. Our updated guidance incorporates the following assumptions regarding the back half of 2023. We are assuming no additional rent from Bed Bath & Beyond. Specifically, we expect the gross rent from Bed Bath locations to be two cents less than what we collected during the first half of the year. We are prudently assuming bad debt to be 125 basis points of revenues for the balance of 2023, which, when combined with the actual bad debt experienced in the first half of 2023, equates to 85 basis points of revenues for the full year. We are anticipating a deceleration of fee income as the first phase of Hamilton Crossing project nears completion. We are not modeling any additional termination fees. And while we sold two assets in the quarter, we anticipate the impact of transactional activity will be essentially neutral to earnings as the blended cap rate on the transactions is well below the interest income offset. Our balance sheet continues to be in an enviable position with net debt to EBITDA of five times, debt service coverage ratio of 5.3 times, 97% of our NOIs unencumbered, over $1.2 billion in liquidity, an undrawn revolver, minimal floating rate debt, a well-staggered maturity schedule, and multiple capital sources. These metrics allow our team to remain intently focused on operational excellence and provide us with the flexibility to immediately pivot and capitalize should a compelling opportunity arise. We have only $95 million of debt maturities remaining in 2023, which we'll satisfy with cash on hand and proceeds from our line. As for the $270 million coming due in 2024, we continue to remain opportunistic as it relates to the unsecured debt markets. The good news is that our indicative spreads have materially tightened recently, which further verifies our patient approach. Before turning the call over to Q&A, I want to take a moment to further elaborate on the progress we're making with the backfill in the Bed Bath & Beyond spaces. We ended the first quarter with 22 units representing 1.4% of ABR and 522,000 square feet of GLA. Thus far, three units were acquired in the bankruptcy auction, six units are either leased or under assigned LOI, and 11 units are in LOI negotiation. As John mentioned, enhancing our merchandising mix with 15 different brands Generating strong spreads and returns on capital and further bolstering the durability of our cash flows is a tremendous opportunity for KRG. Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again.

We'll pause for a moment while we compile our Q&A roster. Our first question comes from Todd Toms with KeyBank Capital Markets. Your line is open.

Yeah, hi. Good afternoon. John, first question, you opened up by commenting that you're working to drive an increase in the long-term growth of the portfolio and talked about some of the success that you've realized this year. I'm just curious what you think the impact of some of those initiatives you know, are having on the stabilized growth of the portfolio today? You know, maybe at full occupancy, if you think about it that way and how that compares to maybe five or 10 years ago. And then is there a target that you're working to achieve in terms of that long-term growth rate for the portfolio, either, you know, in terms of the escalators or otherwise? And, you know, when do you think you might achieve that?

Well, I think, I mean, as you know, Todd, it takes time for that to work through the portfolio. But I mean, there's no question that the embedded rent growth that we're achieving in 2023, as I mentioned very specifically, is significantly above where the portfolio average was, almost 100 basis points. And I hope you caught when I was talking about it in terms of what we've achieved this year, you know, we were including both the anchor and small shop space. But the reality of that is that, you know, the ability to really drive that growth and have it come to fruition more quickly is going to be in the shop space because of the quicker turns and the better ability to get, you know, those 3% and 4% annual bumps. And then, candidly, the CPI adjustment is an insurance policy that we've also added to that. And that used to be fairly, when I say used to be, a long time ago, that was a very typical part of the business. And over the last, say, God, 10 years, there wasn't a lot of talk about that. And, you know, we set it out in the beginning of the year. I mean, we set goals in the beginning of the year. And that was absolutely one of the goals and our team delivered it. And so you know, without getting extremely specific and giving modeling, you know, information, I mean, it's going to help. There's no question. And more importantly, it's a function of the interest in open air retail. All right. So you can break down a lot of different things. But when you look at our non-option renewal spreads, okay, and you look at this part of our business that we're able to now function, you know, now pull in these annual bumps of 4% or 3% with a CPI adjustment, that tells you the business is extremely healthy. And I know there's a lot of talk out there about, you know, how is the health of the business? The health of business is very strong. And for us in particular, it's very strong.

Okay. Are you having success driving annual escalators with tenants, you know, with anchors maybe in certain categories and with certain credits that have historically been pushed back on escalators? You know, are you seeing those changes or, you know, realizing that there?

I'll comment and I'll have Tom jump in. I mean, from my perspective, absolutely, we're having success having those conversations. That being said, I mean, the anchor side of the business is more difficult to, you know, to get that done. So, you know, historically, would we be happy with, you know, a 10% increase after five years in an anchor deal? That would be pretty typical. Now we're trying to push that a little further. So it's, you know, not as readily available because of the way the turnover happens. We just have less turnover there. But, Tom, you want to comment too?

Yeah, I think we have to take a look at this in steps. And we're in the early stages of trying to educate and work with larger box tenants. And instead of no bumps in five, maybe we take a look at a shorter term of three, and then we start the bumps. So we're using different tools to get to the same place, but it will take us longer. But we're very much focused on not only the small shops, but the anchors as well. And as long as we have this focus, as long as the team is ready to go, we expect to make nice advances.

Okay. And then, Heath, you know, a question for you. The portfolio's lease rate decreased 70 basis points versus last quarter, but build occupancy was unchanged at 92.3%. Can you speak to that? in light of the bed bath boxes that you recaptured during the quarter and also maybe provide a little bit of detail around the expected trends for the portfolios leased and economic occupancy rates moving into the second half of the year?

Sure. So, Todd, as you know, the lease rate is basically a point of time at the end of the quarter. So you're looking at that day and you're saying this is how much is leased. whereas your economic occupancy represents your average occupancy during the quarter. So the full impact of the bed-bath is running through your lease rate, but it's not running through your economic occupancy. That's why you also saw a compression on your spread between your lease and occupancy. So as we move into the back half of the year, you'll see the occupancy start to track the lease in terms of its fallout from the bed-bath. So that explains why that delta happened. That explains why we're flat in the occupancy rate. But we're having a more decline in the leased rate. In terms of the trajectory, you know, Todd, as of the first half, we only had eight of the bed baths were out of our occupancy and leased numbers. We're going to add an additional 14 to that going into the third quarter. So you're going to see our leased and occupancy rates sort of trough into the third quarter. So putting some numbers around it, it's about 120 basis points just bed bath alone. So, again, you'll see that drop. And then over the course of time, as we start to sign up those Bed Bath & Beyond leases, you're going to see, number one, our S&O grow, and you'll also see that spread between lease and occupied grow as well. So that's kind of how to think about the balance of the year.

Okay, that's helpful. All right, thank you.

Thanks. One moment for our next question. Our next question comes from Craig Mailman with Citi. Your line is open.

Hey, guys. Heath, maybe just to follow up on Todd's last question on occupancy, as we think about kind of isolating the bed bath, which you did 120 basis points, but then factoring in the commencement of the S&O pipeline. I mean, how much of that would offset kind of this drag from bed bath kind of hitting the numbers in the second half?

Yeah, so Craig, we don't guide to occupancy at the year end, so that's kind of where you're going with this. So I would tell you that I don't think the, you know, the lease rate's not going to move because obviously those are already signed. In terms of the economic occupancy, I don't think it's going to catch up to the full 120 from the bed bath. So I think we'll be ending the year probably at a spot that's lower than where we started the year. But that's really as much direction as I can give you because, again, you know, 120 basis points obviously is a lot of movement to be happening in a single quarter.

Okay, that's helpful. And then, John, I know you said over the past two quarters here it's more about maximizing rate rather than speed to lease up on the bed bath, but it sounds like you guys have really good traction. I mean, from a commencement perspective, maybe relative to where you thought two quarters ago, kind of what do you think updated timing is given how much you have under LOI and then the other 11 that are kind of in negotiations. What do you think the timeframe is to get that revenue back up and running and then maybe also just run through how much of those are single-tenant backfields versus maybe splitting the boxes?

Yeah, I mean, I don't think that the overall trajectory has changed much, Craig, in the sense that, you know, what we've experienced over the last several years, I mean, we've done, what, 60-something boxes over the last few years. You know, generally speaking, when you sign a lease, it's going to take 12 to 18 months for rent commencement, and it's going to depend on how much work you're doing in that space. So I know some people say it happens faster than that, but those are rare. It has to be an as-is deal and not a lot going on in terms of work. So I think we're still on that trajectory of as the leases get signed, it's approximately in that 12-month period. And then I would say in terms of splits, Right now, the majority of the conversations, as they have been for the last two, you know, say four quarters, are, you know, tenants wanting to take the entire space or us requiring them to take the entire space, more importantly. Now, a couple instances where, you know, we may want to subdivide for merchandising mix, and that's kind of what I meant by this is not a speed game. Um, you know, and so, but the splits are pretty rare. I mean, of the 63 deals we've done in the last, you know, whatever, a couple of years, uh, we split one, which is kind of unbelievable. And it goes back to the theme. Open air is strong.

Okay. Um, and then you guys got leveraged down to five times. I mean, from a long-term perspective, um, Kind of what's the goal here? How much capital do you kind of keep dry here for potential opportunities? Kind of thoughts on balance sheet management.

Sure. Yeah, I mean, if Heath wants to talk about this, too, it's good. But, you know, from my personal perspective, you know, we're at five times. You know, that's going to ebb and flow, you know, quarter to quarter a little bit, but not materially. Um, so we're at the low end of our range that we've set out as a goal, um, which is pretty fabulous. Uh, you know, we've, we've delivered basically a turn and a half since the merger. Um, you know, that's another beautiful benefit of the fabulous deal that was done. And, you know, so we're, you know, we wanted to make the point that our balance sheet is, is, you know, one of the top two in the entire sector. And that affords us this ability to continue to operate at a very high level. But also, you know, if an opportunity arises, then we're one of the few that probably can act upon that without any material, you know, issues with our balance sheet. So we love where the balance sheet is. It's a very strong position. And, you know, we want to continue to be, you know, in the low to mid fives, like we've been saying. And again, that affords us You know, lots of optionality. Keith, you want to?

Nothing there. Okay. Great answer.

Keith, did you want to add anything?

No, nothing there. Thanks. I took the words out of his mouth.

The balance sheet's in great shape. Lots of liquidity. One quick one. Keith, is there anything legacy RPI related on swaps, amortization that's running through the numbers and If there is, kind of how long does that, what's the tail on that until that burns off?

I'd have to look at our maturity schedule and figure out which one of the RPAI debt instruments are swapped and how long they run through. So I think it's nothing material running through it. I will tell you the one thing that's continuing to run through the P&L that's a swap, as you recall, in 2021, we took out that forward. That was $150 million. That's resulting in about a $3 million benefit every year to our interest expense. One thing about it, it's a little lumpy, so you may have noticed there's a sequential sort of increase in interest expense from the first quarter to the second quarter, because when we realized that $3 million, we realized half of it in the first quarter and half of it in the third quarter. So it gets a little lumpy, but nothing occult with those swaps that you're thinking about, Craig. And again, we can offline take a look at when those things exactly mature if you want me to quantify that for you further.

No, that's helpful. Is there anything to call out sequentially on interest expense from 2Q to 3Q?

Again, other than in 3Q, you're going to see the benefit of that $1.5 million again. And then, you know, obviously there's a slight increase in SOFR based on recent moves by the Fed. So to the extent that we have a floating rate debt, you'll see a small uptick, but nothing material quarter over quarter.

Great. Thanks, everyone.

One more before our next question.

Our next question comes from Floris Van Dishcomb with Compass Points. Your line is open.

Hey, guys. Thanks for taking my question. I guess let me start with, as you, John, I mean, you sort of mentioned this in some of your comments as well, you know, raising the long-term growth rate of the portfolio. Part of that, obviously, is through higher fixed rent bumps, particularly on the shop space, and also how you change the anchor bumps going forward. I think one of the other things that is, you know, oftentimes overlooked is, um, your, uh, your move to a fixed cam was probably one of the earliest in the shopping center space. And, um, you know, we've seen this play out 20 years ago, 25 years ago in the mall space where Simon and GGP were the sort of the impact. I think GGP was the first one to do it, but Simon followed shortly thereafter. in terms of going to fixed cam and Simon has stopped disclosing because the profit margins are so large on that part of the business. Maybe could you give us a little bit of an update on how fixed cam is going? What percentage of your portfolio is that? And what kind of bumps are you getting in terms of escalators and how you see that enhancing your growth going forward?

Sure. And I guess he brought the fixed-cam initiative from GGP, so we're thankful. But the reality is we're doing very well there. We've gotten back much quicker than we thought. When we did the merger, we were around 50% of the portfolio was fixed-cam, and we're already back at 50% for the total portfolio. And as you know, RPAI had almost no fixed CAM at all. So it's quite amazing how quickly we've gotten back, which shows you that our conversion ratio is in the 90% range. So look, the initiative is great. I guess it's not for everybody. But for us, it's been a really smart thing for us to do. When you look at our ratios, you look at our NOI margin, things like that, I think that's where it shows up. And obviously, it has escalators. We don't disclose those escalators because that's a competitive thing. But the reality is they're probably higher than those base rent escalators. So I think, look, Flores, in this business with the way rollover works and the time associated with, you know, that coming online, this is all adding. But when you, you know, in all the deals we've done this year, right, and as I said on my prepared remarks, we're almost 100 basis points better than, you know, historical portfolio, right? So that just shows you that this is a movement in the right direction and I do think that it's, you know, a lot of it is how we run the business, but it's also a function of the strength of the platform in terms of open air retail. And you've just got so many more retailers that are coming into the space. It drives that friction. So suffice to say, I do think it is a big part of what we're doing. You know, obviously,

reimbursements is is a smaller percentage of our revenue but it's a material percentage and then as a maybe as a follow-up you sold one of your potential mixed-use development sites at Pan Am I think at a you know almost a zero a very low cap rate obviously Could you maybe update us on your thinking on some of these other mixed use sites in particular? Maybe give us an update on what's happening in Ontario, California with the former cinema box there. And then I think you extended the cinema short term, but how is the entitlement process going and what are you thinking there? And then maybe has your thought process changed on what's gonna happen at Carillon going forward, the fact that there's very little new developments and, you know, are there elements of that, particularly in terms of retail, that you might be interested in?

Let me just give you a second, then I'm going to have Tom give you the details, but in terms of Carillon, specifically, you know, we've been pretty clear that when we laid out our strategy on the developments, the future developments, that, you know, we kind of looked at that quite differently than we did one Loudoun, for example, and that hasn't changed. You know, I think Carillon's great, and it's a great piece of real estate, but for us, in terms of investing a lot of new capital, we're not looking to do that. We're looking to minimize the investment there and maximize the investment in One Loudon. So thematically, that theme hasn't changed, but I'll let Tom give you more details.

Yes, then on Pan Am and specifically, that was a deal that we ended up selling the property to the city of Indianapolis. There was no question that the highest and best use for that property was a convention center expansion and a large hotel. So that part was very straightforward and easy for us. Then on Ontario, east of LA, we have a great 19-acre parcel. So we are in the process of working with the city and working on various concepts of repurposing that property from a zoning standpoint. So that is moving along nicely. So, on all these, including Caroline, we're just taking a very measured approach, doing the right thing, not forcing projects or developments that don't make sense based upon the time periods of which we're in.

Did you want me to go ahead and move on to the next question?

Yeah, sure. Thanks, Flores.

One moment. Our next question comes from Alexander Goldfarb with Piper Stanley. Your line is open.

Hey, good afternoon out there. So two questions. Heath, you know, your bad debt assumptions, I think you guys were pretty low in the first half. I think it was 45 bps or something like that. It was pretty low. Back half, you're budgeting 125. You already know about, you know, Bed Bath and Party City, AMC, all the known ones. So my question is really, you know, and you're not alone. A number of the peers are being cautious on bad debt. Are there truly concerning tenants out there, or is this just sort of you and other teams just trying to be Alex Fajardo, conservative to based on historic like just trying to get a sense, because it doesn't seem like from the headlines that you know they're big tenants that are pending out there, but maybe there's stuff that's bubbling below the surface that we don't know about so just looking for a bit more perspective.

Alex Fajardo, Now Alex I think the 125 basis point assumption is really rooted in history, looking back, you know typically we run between 75. and 100 basis points of revenues as a typical year of bad debt, and then laying on top of it that we're in a strange environment, and there's no question that the economy and the macro environment is full of uncertainties. So there isn't this occult list I have in my pocket, Alex, where I'm saying, well, I better make sure I have enough bad debt to cover in case X, Y, and Z falls out. So there's nothing specific. It's just us saying, okay, let's assume it's going to be close to what we see historical, plus let's add a little extra because the environment is strange. So That's really it, so there's no magic to it.

Okay, and then the second question is, on the apartment front, just maybe a bit more color, especially as the environment steadily improves, and maybe we can get back to some sort of transaction normalcy. Are you guys, the apartment initiative, is this like converting parking fields? Is this like behind shopping centers? Is this adding second or third floors? Or are you guys buying adjacent land to existing centers to put apartments, just a bit more perspective. And I think John, you said you would bring JV partners to, you know, sort of run these deals and help do everything. So just a bit more color.

Sure. Yeah. I mean, I think it was everything except the last, the last bullet. We're not, we're not like actively out looking for land, um, adjacent, uh, to acquire generally speaking, we already own the land. So yes, I mean, we've done a little bit of everything that you mentioned there, Alex. And it's been interesting because, you know, sometimes we have contributed a parking lot and taken a, you know, say a 15% equity interest vis-a-vis the value of the land. And then sometimes we've contributed capital. It's a little bit of everything, but we have generally not looked to do it solely ourselves. Obviously, we have been learning the business over the last several years pretty significantly. That said, I think at this point we believe having some sort of operating partner, depending on what percentage they might own, is really going to be dependent on the deal. But the point we're making is that this potential stream of revenue is growing, and we own the kind of quality real estate where people want to add multifamily. So it's a nice complement to the primary business. It generally has a higher growth profile. But again, we're going to be very measured in how we go about it as we have been to date. But the reason I mentioned it is probably a lot of people don't really think of that, that we've already amassed an equity interest or ownership interest in almost 2,000 units. And we have 5,000 units that are entitled. I mean, so we have a substantial kind of ability to continue to grow that part of the business. but we'll do it in a measured way. By the way, that's why our leverage is five times, right? We're measured, we're thoughtful.

And then John, but to that point, the 1700 units, those are, are those all operating right now or those are what you have under control that you could build?

Yeah, no, no, no, no, I'm sorry. Those are operating. Um, and then we have a, how many of those are under construction?

Yeah, so we basically have four or five opportunities that are out there. And one number that you may have gotten confused with is just at one Loudon, we have 1,745 units through the zoning process that we would be able to develop. So if you look at what we have under construction right now, it is the corner project. But it's 285 multifamily units, and the first occupancy of that will begin just towards the end of this year. But there's an inventory of opportunities for us. We'll be very measured. We'll make determination when the right times are. But it's good to have that entitled land inside our future opportunity list. Thank you.

One moment for our next question. Our next question comes from Anthony Powell with Barclays. Your line is open.

Hi. Good afternoon. You put a new slide in your deck with delivery to the flagpole versus the total lease rate, which is very positive for you. That said, it suggests to me that at some point people will want to put more money into the space and actually construct new retail centers. So how far are we away from that? Is there a risk that in the next new easier money time that we have that people will start to build more retail centers given the strong economics and results we see.

Anthony, hi, this is Heath. I'll start and let John add on later. So I still think the environment is such that we're going to be in a continued Low supply environment or low new supply environment. I mean, really, if you look at what construction costs are versus what you can buy an existing center for, especially an existing center where you may have some redevelopment plan where you can maybe even get it below replacement cost value. So I think structurally, things are still looking good for us in terms of what new supply is going to look like. on a go-forward basis, and we're certainly not looking for raw parcels to do any greenfield construction ourselves. Obviously, we've got a lot of wood to chop on our existing projects for densification and multi-use or redevelopment of some of our projects as well. So, again, us personally, it's not one of our sort of capital allocation levers we plan on pulling. And I think everyone else is looking at it the same way. I think economically it's probably better to acquire at this point than it is to build new supply. But I'll let John.

No, I mean, he said it perfectly, Anthony. I just don't think that there is enough yield in a ground-up deal. And you also have to remember, a ground-up deal generally would take you three years minimum to get to revenue. I mean, probably five if you're really getting into finding the land and going through the entitlement process on stuff where you'd want to own it. So, I mean, it's one of many reasons, but at this point, it just does not feel like there's a push towards new development. And candidly, you still, we're still working through an overbuild from, you know, the previous decade, right? So as you work through that overbuild, it becomes, this is why it's a better business today. I mean, there's 100 reasons why, but this is one of the very, very strong primary reasons is a better business. And I don't see that changing at any time. And when you look at the deals that we do occasionally, We generally already own the land and our returns are well above what we would be otherwise getting. That's why we do the deals. You know, landing a tradition is an example of that.

Got it. Thanks. And going on to other capital allocation, you know, some of your peers have either announced deals or rooms for announced deals. There's one talking about seeing new deals come back to them this morning. What are you seeing out there? I mean, I know that your priority is leasing, but any potential you start to ramp up the market? the acquisition pipeline given the environment?

No, I mean, I think that the acquisition environment is still tepid. That being said, there's no question that there appears to be, you know, maybe even in the last six weeks, more product coming to market. It continues to come to market as individual centers. I haven't, you know, there's a couple larger portfolios that would have been no interest to us. So we're actively involved in reviewing opportunities. As I mentioned, we have one of the top two balance sheets in the entire sector. So if we want to do something, we can. But we're very, very selective right now. We have plenty to do. And so I think, I don't know about in terms of things coming back to market. I mean, I guess if deals were pulled at some point in time, they're probably coming back around. It's just new packaging. It's the same deal, right? So for us, we're really more focused on if we're doing acquisitions, we're generally pairing that trade with a disposition. So right now, that's kind of where we are, which is why he said we're looking at that impact to be neutral. But again, we're early. I mean, it's, you know, we have a whole nother half a year. A lot can happen.

Thank you.

Thank you. Thanks, Anthony.

One moment for our next question. Our next question comes from Lizzie Doerker with Bank of America. Your line is open.

Hi, everyone. Apologies if I missed it. I just wanted to see if you could give more color on the decline in small shop occupancy. It seems to drop a bit more than the dip we saw even last quarter.

Sure. I mean, it's pretty simple. It's really the majority of it. I mean, there's a small part of it. I think it was Jenny Craig who But really, the majority is actually us accelerating recapturing space, probably 75% of the drop, where we had an opportunity to move tenants out if they're in default. And in this kind of environment where we're getting the annual rent bumps that we're getting and the quality of tenants we're getting, I think we're moving very quickly to enact that pricing power. So There's really, that's really it. I mean, it's really more something that we want and we will continue to want to get our hands on.

I'll just add, if you recall, you know, our small shop lease trade was the highest in the sector at 92.5%. So really where we're sitting now, we're just viewing this as a tremendous opportunity. As John said, Before, you know, we've got leases and it takes a long time to effectuate change. So if we can recapture faster and get a better tenant with better rent in, we're going to do it. So that's what's happening.

Yeah, that 92.5 was, you know, pre-COVID. And so there's no reason to believe we won't march back to that, but it obviously takes time. But I think the more important thing here is the theme is if we can get space, we want space. That's the theme.

Okay, thanks. That's helpful. And then I noticed you have a good outlay on page 15 of the deck on just your anchor inventory opportunity. And I just was curious on the 17% spread that's expected on what's left. And just compared with the 26% spread that's been executed, Is the lower percentage there just a function of what's been executed last quarter, or is there anything to comment on there in terms of the expectations around rent growth?

No, this is certainly not a sign that we're decelerating a simple math. It's just basically taking our average in-place rents. and calculating the spread that way. As you can see, we're trying to be conservative and saying, well, if we at least got our average rents in place, we'd have a 17% spread. Obviously, with the column to the left, you can see that we're doing much better than that. So we anticipate being able to outperform that, but for this presentation here, we're trying to be conservative, and you'll see footnote four will give you an explanation of that number.

Our leasing team asked the exact same question. Why isn't that lower? We don't expect that to be the case.

Okay. Thanks, everyone.

One moment for our next question.

Our next question comes from Michael Mueller with JPMorgan. Your line is open.

Yeah, hi, just two quick ones. First of all, when you talked about the 2.4% bumps on Q2 activity, was that all in or was that just excluding option renewals? And then the second question is, are you just seeing any demand differences when it comes to the various product types like lifestyle versus community neighborhood or geography?

Yeah, first of all, it excludes options. So that's new leases. I'm sorry, Mike, what was the second part?

Yeah, just any demand differences you're seeing across the product types, basically.

You know, really, I mean, that's one of the benefits of our portfolio and the different product types that we have. There's been such cross-pollinization of retailers wanting to be in these kind of three major food groups as we broke out in the investor deck, you know, community, neighborhood, mixed use, lifestyle, and power. So, and there has really been no real, you know, differential there. And from a geography perspective, I mean, the geographies that we're in are very strong. So we're benefiting from that. I mean, as you know, 40% of our, almost 40% of our revenue comes from Texas and Florida, which I think is the highest in the space of those two states. So that has afforded us a lot of opportunities because those are two very important growing markets for retailers. But by the same token, I mean, it's very broad based. And I think we made the point in the remarks that when you get to this kind of friction point when supply has dropped so much over the last few years and demand has gone up a lot, I mean, that's what's driving that increase. Got it. Okay.

Thank you. Thank you. Thanks, Mike. One moment for our next question. Our next question comes from Lisa Sy with Jefferies. Your line is open.

Hi. It's Linda. In terms of success in achieving fixed rent bumps, it sounds like those tenants are comfortable with their occupancy cost ratios You know, how do you think about the opportunity to increase occupancy cost ratios and which tenant types have better capacity when you look at your portfolio composition?

Sure, Linda. Very good question. I think that's, again, back to my theme on open air. I mean, one of the beauties of this platform is that the occupancy cost is low on a relative basis. you know, when you're comparing to other types of retail and especially when you're comparing to online only, you know, the acquisition cost of the customers is crazy. So I think the drive here is that, you know, when you look at the total portfolio, we've historically been, you know, high single digit occupancy costs kind of, and you compare that to high teens. I mean, you can see that In other platforms, you can see that that is a real driver in their ability to continue to pay rent bumps. But by the same token, we have to make great selections about who the retailers are, which is why we mentioned that it's never a foot race. You're always looking to thread that needle between the merchandising mix, the retailer's ability to perform, and the cost to occupy. So right now, we're in a very good sweet spot as it relates to all those.

And we'll see some fluctuations simply through geographics of different areas that have higher wage scales and maybe a little more difficult supply chain concept. But I think all in all, we're doing a very good job watching that ratio, wanting our customer to be as healthy as possible. So it's a big focus around here.

Are there certain tenant types that have better capacity, or does it relate back to kind of just wage gains and sales of a particular region?

Yeah, no, I don't think you can really pick a particular type of retailer. It comes down to the individual store and how it performs, and they can be very different across even the same brand, right? This is why real estate is so important. I mean, you've heard us talk so many times about, you know, we focus on the dirt. We focus on the quality of the real estate. What's on top of it is fungible. So, you know, as long as we own very high quality real estate, then we should be able to produce, you know, or I should say our customers should be able to produce results that allow it to continue to prosper and for us to prosper. I And we're pretty good at managing that partnership.

And then in terms of payback periods on anchors and small shops, given the demand for space and some commodity costs coming down, do you expect payback periods to shorten?

I mean, yes, we're seeing them shortened in general. And they generally are less than three years, you know, when you look at the total portfolio. but it really depends on the individual deal, Linda, as you know. And that's why we focus on return on capital a lot more than spreads, even though we're getting great spreads and we talk about it, especially when you look at our gap spreads, right? And that's where our rent growth comes into play. But bottom line is, our job is to be very good fiduciaries with our you know, investor capital. And so we're much more focused on getting that, you know, those high returns, which we've been doing.

Thanks.

Thank you.

One moment for our next question. Our next question comes from Dori Keston with Wells Fargo. Your line is open.

Thanks. Good morning. How do you expect CapEx spend to trend over the next 12 to 18 months, including and excluding the cost to get the old bed bath spaces back online?

So, excluding the cost to get bed bath spaces done, over the next 18 months, it's upwards of $200 million. And so, if you look at the total of bed bath inventory and what that might cost, it's probably somewhere in the neighborhood of between $40 and $50 million additional. to get those leased up as well. And you'll see that spend probably later part of 24 into 25. So again, we've got significant capex spend. We've got a significant sign-out open pipeline. So it's going to be elevated over the next, call it two years.

But we do see construction costs in general stabilizing. And I think we'll be able to see some more movement in that as general contractors, construction managers, begin to start pushing some of those savings down. So, we feel like we're in a much more stable area as we tackle some of these costs.

Okay. Thank you.

One moment for our next question. Our next question comes from Wesley Galladay with Bayard. Your line is open.

Hey, everyone. I'm just curious which markets have the best pricing power and is there any region that is materially separating?

Hey, Wes, we were talking about that a bit earlier. Right now, it's pretty well balanced and there is not one market that we see that is way outpacing another in terms of pricing power. I mean, obviously, some markets have higher embedded rent than others just because of the history of the market, you know, like in the New York region, for example. But in terms of growth, it's very, our ability to drive annual growth is widespread. And look, there's been a significant suburbanization over the last couple of years, and we've been a big beneficiary of that. And that appears to be pretty solid, like not fading. But that said, also, when you look at our gateway markets like Seattle or, as I said, New York, Chicago, et cetera, those are growing as well. So there's a pretty strong bid out there for this type of retail. It's just pretty basic.

T. John McCune, M.D.: : Okay, and then I think earlier in the prepared remarks, you mentioned the fees would step down for Hamilton crossing or fees, because I could you stop the development at Hamilton crossing, can you quantify that and then, as we look to next year, is there anything noticeable when it comes to like a mark to market debt amortization for interest expense.

Yeah, so the first part, the deceleration of the fees, it's about a million dollars back half of the year, less than it was in the first half of the year. So again, that project, the first phase of Hamilton Crossing is winding down, so those fees are going to be ending soon. However, there is a potential for future phases there, so you may see some more development fees turn on maybe before the end of the year and into 24. So hopefully that'll be something that we can repeat going to 24. And then in terms of the, what was the second part of your question? Was it the debt amortization? Yeah, the market gain. Yeah, and the market gains will probably see a decline of, I don't know, call it two pennies, around $4 million into 2024 as those maturities hit.

Okay, thanks for that.

One moment for our next question. Our next question comes from Paulina Rojas with Green Street. Your line is open.

Hello, everyone. So we have long heard about mall tenants looking to migrate to the open-air space, some of them. And you also highlighted in your presentation two questions. Is this migration mainly taking place at your lifestyle centers, or you're also seeing it across other subproperty types? The second one is, have you seen this trend accelerate, or is it progressing at a steady pace?

Hey, Pauline. So macro, and Tom should comment, obviously, but macro, this trend, I don't know if trend is the right word. I mean, it's really just the fact that there's less retail space, the open-air retail space segment is very cost effective. So you're finding retailers, you know, really not delineate as much as they once did in these different product types. So I do think thematically it's important to understand. I think it's more than a trend. I just think it's the business. The business has changed. And these retailers have realized, again, and Tom can give detail, the retailers have realized Their profitability in the open-air sector is significant, and that's why they want to grow the platform quickly. But Tom can give you a little more detail.

Yeah, Pauline, I think it really comes down to one major factor, and that is convenience. And I think as people become more and more busy in their lives with the various things that pull on them, the convenience is critical that you can pull up to an open-air shopping center, get out of your car, and immediately ingress into a store and then cross-shop as well. And then, you know, in addition to that, you are able to get shops online. maybe two or three times a week where if you were in an enclosed situation, that may be just one event a week. And then with our expense structure, these... these numbers start to overwhelm some of these retailers saying, we have to diversify. This doesn't mean that they're leaving their primary A locations and shopping center. It just means they need to touch a different shopper in a more convenient atmosphere. So we are seeing great strength. And like John said, this is just an evolution that is very consistent. And we're even seeing You know, some groups like maybe a Sephora that's even leaning out maybe beyond a higher open-air shopping center into more of a power or more productive center like that. So I think we'll see these tentacles continue to expand over the next couple years, which has obviously been a big help to the open-air industry.

Thank you, that's helpful. And another short one. So other income has been a positive for same property and high growth. I believe this is capturing the overage rent you mentioned. Can you touch on what retailer categories are driving this growth and if you expect the full year contribution to be in line with what we see year to date?

We're seeing that overage rent over a broad array of tenants, so it's not really one particular tenant type. We have tenants that are paying us percentage rent that never paid us percentage rent at all. We have a furniture retailer. that is paying us just an amount of overdraft we never thought was possible. So it's really been extremely broad. It's restaurants. It's the discounters, grocery stores. So you name it, we're seeing it everywhere. And we're experiencing the highest levels. We're even seeing it in theaters. We're experiencing the highest level of overdraft we've ever experienced in the company. So we expect that trend to continue.

And I'm not showing any further questions at this time. I'd like to turn the call back over to John Kite for any closing remarks.

I just wanted to say again, thank you all for taking the time to join us today, and thank you for having an interest in KRG. Have a great day.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect and have a wonderful day.