Kite Realty Group Trust

Good day and welcome to the Q4 2023 Kite Realty Group Trust earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would like to turn the call over to John Kite, Chairman and CEO. You may begin.

And this is Brian McCarthy to kick it off. Thank you and good afternoon, everyone. Welcome to Kite Realty Group's fourth quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 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 Tite Realty Group, our Chairman and Chief Executive Officer, John Kite. President and Chief Operating Officer, Tom McGowan. Executive Vice President and Chief Financial Officer, Heath Fear. Senior Vice President and Chief Accounting Officer, Dave Buell. And Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. I'll now turn the call over to John.

Thanks, Brian, and thank you, everyone, for joining today. We are understandably proud of what we've accomplished in 2023, and over the course of 2024, we will continue to operate from a position of strength. Heath will walk you through the details of our results and our 2024 guidance, and I'll spend my time looking back at some key 2023 accomplishments and our action plan for 2024. At the beginning of 2023, we guided to NAE REIT FFO of $1.93 per share at the midpoint with same store growth of 2.5%. We delivered NAE REIT FFO of $2.03 per share and grew same store by 4.8%. Our primary focus in 23 was to lease space at attractive risk-adjusted returns. And in fact, we leased 4.9 million square feet at blended cash rent spreads of 14.3%. New leasing volume represented 1.1 million square feet with a blended cash spread of 41.3% and a return on invested capital of approximately 30%. 380,000 square feet of new leasing was in the fourth quarter, representing an all-time high for KRG. We leased 26 boxes in 2023 to high-quality and well-capitalized tenants, including Whole Foods, Trader Joe's, Total Wine, PGA Superstore, Golf Galaxy, Sierra, HomeSense, Pop Shelf, Five Below, Foot Locker, Restoration Hardware, and West Elm, to name a few. Our leverage improved to 5.1 times net debt to EBITDA, one of the lowest in the sector, and our liquidity remains at $1.1 billion. Our development and construction teams delivered and opened 235 tenants, representing $36 million of annualized NOI in 2023. We continue to have success pushing higher embedded rent bumps, primarily in the small shops, In 2023, fixed rent bumps for new and non-option renewal shop leases were 300 basis points, which was 60 basis points higher than the in-place shop average. Improving our long-term growth trajectory will take time, but we remain focused on elevating the growth profile for the entire portfolio. We actively recaptured space from poorly capitalized or lower growth tenants and replaced them with tenants that have superior balance sheets, better offerings, and higher growth. As we've mentioned time and time again, we measure our leasing success in terms of tenant quality, merchandising, rent growth, and return on capital. We kept our development spend in check while at the same time preparing our pipeline for activation once we've completed the elevating leasing activity. We relentlessly advocated for a ratings change, resulting in an outlook upgrade from S&P, which we expect will materialize into a full upgrade to BBB in the next 12 months. During 2023, we sold four non-core assets for a mid-five cap, generating $142 million in proceeds. We purchased Prestonwood Place and the Dallas MSA, for a high six cap for approximately $81 million. Over the past two years, the blended cap rates on dispositions have been approximately 125 basis points tighter than the cap rate on acquisitions. Based on our success in 2023, it follows that our action plan for 2024 would be very similar. We will aggressively lease up our vacancy while achieving higher embedded growth and enhancing the merchandising mix. Our sign-not-open pipeline increased to $31 million, and we expect 87% of the NOI to commence in 2024. Over the first half of 2024, we expect the S&O pipeline to remain elevated, reflecting the velocity of new lease execution against the rapid pace of tenant openings. On page seven of our investor update, We detail the compelling opportunity for investors based on the current share price and the potential prices at various capitalization rates, taking into account the $31 million of signed not open NOI. It's important to note that this page does not account for any additional lease up or the significant value of our entitled land bank. We expect to spend over $200 million on leasing capital in the next two years. while still generating free cash flow. As we've emphasized on numerous occasions, leasing space in this environment is hands down the best use of capital as it relates to the absolute and risk adjusted returns. It's worth recognizing the longer term AFFO cash flow and leverage implications due to our elevated leasing activity and associated capital spend. Looking at our model, our leasing spend begins to normalize towards the back half of 2025. At the same time, the incremental rent from all new leasing activity begins to peak, resulting in meaningful earnings and dividend growth, plus a dramatic increase in AFFO per share. Our leverage levels dip significantly and the cash available for investing activities ramps up to a level well in excess of $100 million a year. During 2024, we'll keep our development spending check and provide more detail on each of our opportunities when appropriate. We expect acquisitions will be matched funded with proceeds from dispositions with the goal of exiting lower growth properties or one asset markets and relocating that NOI into our target markets. We'll also keep the pressure on the rating agencies in pursuit of ratings that more accurately reflect our credit metrics. Lastly, we're embarking on an investor outreach plan called 4 in 24. Our goal is for investors to better understand the high quality of our portfolio and the depth of talent across the entire organization. We look forward to seeing many of you at our first event in Naples next week and at the subsequent events in Dallas, Washington, D.C., and Las Vegas. In closing, KRG produced another year of operational outperformance in 2023 and we intend to exceed expectations again in 2024. Thanks for your time and continued dedication and commitment. We turn the call over to Heath.