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.

Thank you, John. With the fourth quarter of 2023, KRG earned 50 cents of NAE REIT FFO per share and $2.03 per share for the full year. During the quarter, same property NOI grew by 2.8%, primarily driven by a 170 basis point increase in minimum rent, and 120 basis point increase in net recoveries. For the full year, same property NOI growth was 4.8%, with primary contributors being higher minimum rent, all-time high overage rent, and lower bad debt. As John mentioned, we exceeded our original 2023 FFO guidance by $0.11 per share. $0.07 of the increase is related to operational outperformance in our same property pool. $0.02 is attributable to properties outside the same property pool with the remaining $0.02 related to the net impact of non-cash items, termination fees, and net transactional activity. We are establishing 2024 NAVY FFO guidance of $2 to $2.06 per share included in our guidance to the following assumptions, a same property NOI growth range of 1% to 2% and a full year of bad debt assumption range of 75 to 125 basis points of total revenues. On page five of our fourth quarter investor presentation, We set forth a bridge to quantify the impact of year-over-year trends in our 2024 NAE REIT FFO guidance and the same property NMI growth assumption. It's important to note that but for the following three items, our 2024 same property growth assumption would have been 200 basis points higher at 3.5%. The net impact of the bankruptcy of Bed Bath & Beyond the failure of a large theater tenant to renew its lease in November of last year. And during 2023, the company experienced a historically low level of bad debt at 42 basis points of revenue, while the midpoint of our bad debt assumption for our 2024 guidance is set at 100 basis points of total revenues. Taking a longer-term view on growth, from 2021 to the midpoint of our 2024 guidance, our FFO CAGR is anticipated to be 10.6%, and our average annualized same property NOI growth is anticipated to be 4.4%. Also, it's worth noting that from 2021 through 2023, our dividend CAGR was 18.8%. Our net debt to EBITDA stands at 5.1 times, which remains at the lower end of our long-term target. Additionally, our debt service coverage ratio remains above five times, and we have over 1.1 billion of liquidity. Subsequent to quarter end, KRG returned to the public debt market by issuing a 10-year, $350 million bond at 5.5%. The fact that we were more than 10 times oversubscribed was not by accident. We spent a year reintroducing KRG to the fixed income community and successfully navigated a very tight issuance window. While we are very pleased with the execution and demand, we see an opportunity for further spread compression as our bonds become more liquid and our ratings improve. Proceeds from the bond will be used to satisfy all of our 2024 debt maturities when they come due at the end of June. In the meantime, we have the proceeds invested in an account earning interest in excess of the yield on the maturing debt. Thank you to the fixed income community for effectively re-rating our cost of debt to levels that are more reflective of the state of our credit metrics. As John mentioned, we look forward to showcasing our Naples portfolio at our first 424 event next week. The dates of the next three installments in Dallas, D.C., and Las Vegas are available on our website. Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. If you'd like to ask a question, please press star 1-1. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 1-1 again. Our first question comes from Todd Thomas with KeyBank Capital Markets. Your line is open.

Hi, thanks. Good afternoon. A couple questions. First, in the guidance, you included two cents related to the theater at City Center, which closed late last year. Can you just speak about plans to backfill that space, which I think it's a third floor space, and just talk about if you could just give us an update on that and sort of the opportunity to backfill that space?

Sure, Todd. This is Tom. So we embarked on a process of trying to bring in four to five potential users. We have now broken that down into one that we're focusing on very aggressively at calls with them yesterday. So our hope is to try to bring them in with an executed lease by the end of the first quarter. And based upon the condition of the space, we should be in a position to commence rent very aggressively. So we have moved through that process in an expeditious manner. So we should be ready to go by the end of March.

Okay. And Heath, the two cent impact, does that assume any commencement during the year or is that, you know, basically assume the space is vacant throughout the year in its entirety?

That assumes that the space is vacant, Todd. So any rent that Tom can turn on this year is going to be incremental to our guidance.

Okay. And then the expense recovery rate increased in the quarter. It was above 92%. I know you've focused on efforts to transition tenants and sign new leases with fixed CAM provisions. How should we think about that expense recovery rate moving forward? I guess what's assumed year over year in terms of the impact from net recoveries in the same store forecast?

Yeah, so Todd, both of those numbers, the NOI margin and the recovery ratio, were a little higher this quarter. Part of it's timing. Part of it was we did better on real estate tax assessment challenges. We got a real estate tax refund that was related to a prior period. So I would tell you that right now we're sort of normalizing in the NOI margins in the mid-70s. And the recovery ratio in the high 80s is sometimes approaching 90. But again, as we start signing up more and more of this fixed cam in our leases, this is going to be the gift that keeps on giving over time. Those numbers are going to continue to crawl up, again, as we get more people on fixed cam.

Okay, great. All right, thank you.

Thank you. Our next question comes from Flores Van Dykem with CompassPoint. Your line is open.

Hey, guys. Thanks for taking my question. I gather there is a bit of conservatism. Both John and Heath sort of alluded to that in your initial guidance, which is always good, but it can scare people a little bit sometimes. Maybe, you know, John, I would love to hear your thoughts on you know, the significant transformation that has occurred at KRG over the last, you know, call it, you know, six, seven years, maybe in terms of portfolio quality. And I think he sort of alluded to it in terms of, you know, the balance sheet as well. What do you think, in your view, what are the biggest transformational changes that you have seen And what does that mean for growth going forward?

Well, actually, Floris, I think, you know, if you look at our investor presentation, you know, there's a handful of pages in there that are really important. And one of them is page eight, which kind of shows you the metrics and the growth that's occurred and the improvement and the quality of the portfolio that's occurred since 2019. And it's pretty easy to look at that when you look at our ABR growth, you look at our blended cash rent spreads, and you look at our FFO CAGR since 2019 over that period of time against a few select peers of the bigger peers. I mean, we've outperformed. We've been number one in each category. You know, the transformation has been massive, and it's happened very quickly. And maybe people, you know, I understand that the intro to your question in terms of guidance, you know, it's, what is it, February. So it's very early in the year. This is how we approach it. We look at every variable, and there's a lot of them. And, again, this is a portfolio in transition. But as we laid out in the prepared remarks, the upside here is very substantial. And that's just mathematics. That's just the metric upside. The upside in getting people to understand the quality is the other thing that we have to focus on, maybe even more so. Because it's happened so quickly and people maybe haven't been able to really get out there and see the assets. And I know we've spent some time together on the ground. So I think you understand what I'm talking about. It's not just the assets, but it's the relative quality of these assets as compared to peers with much higher multiples and lower cap rates. So it's a question that I could probably talk to you for an hour about, but the reality is the portfolio has changed, you know, dramatically. It's improved dramatically. And our people have improved dramatically who are executing this plan. So long story short, it's just way better. And I think the metrics make it clear.

Thanks, Sean. Maybe, Heath, maybe if you can touch on, you know, a couple of things, presumably, that you have in your back pocket. I know that you have a a big portfolio of non-income producing lands. Maybe, you know, are you seeing some demands from investors on some of those land sites? And then maybe if you can also update us on what's happening in California in the other theater that you had there that I think you're looking to re, you know, entitle to a different use.

Hey, Flores, it's John. Let me start that real quick, though, on the land. I want to be clear what we're doing there because, you know, it's very important that the market understand. We have an entitled land bank that has significant value that when you, again, go back to our investor presentation and look at the page that goes through NAV, I think which is page, I'm turning it right now, page 7. you'll see that we're not including that in how we're kind of handicapping, you know, stock prices. That being said, it doesn't mean that we're not working on it. It doesn't mean that we're not actively engaged in having that be the next level of upside. And, you know, we've been pretty clear about that, that we are going to be CapEx Lite customers. in the development program while we're spending $200 million at very, very high returns in the leasing program. So I wanted to give you that basis before we dug into anything particularly specific. But again, I think it's just another area that is very misunderstood in the sense of what we're doing to prepare to create that value. Tom, you want to?

Yeah, so if you take a look at our supplement, there's seven properties that are identified, and then in addition to that, we have Legacy and Lakewood that are also on our list. So if you take a look at those nine properties, we have about 76 acres that are able to be developed, and they would be developed in a form of different styles and different approaches with JVs, maybe a potential sale, ground leases. So we're being very thoughtful of the best way to do that. But if you take a look at apartment, you know, apartment counts that can be done there, retail, office, et cetera, it offers a lot of opportunities as we're moving forward. And that's going to be a big goal as we move into 24 is moving those to the next level to be in an income generation position.

And the movie theater in California?

Yeah. So on the movie theater in California, it's Ontario, a little bit east of LA. We're in the process of moving forward with a rezoning process. And that rezoning objective is to ultimately put the property in a position to sell to various multifamily developers. So we're making great progress there, but You know, it's a situation that it could at some point generate 800 multifamily units in an area that is very much starved for that type of housing.

I mean, you know, the thing about that, Flores, we already today have an economic interest in just under 1,700 units that are open and operating today. And, you know, the one Loudoun project alone is another 1700 units of potential growth. But I want to be clear. And so, you know, the reason we don't bring up Ontario is it's a long process. It's got to get rezoned. But the value creation is enormous, as you might imagine. So, I think it all kind of comes back to the thematic that we have an incredible next couple of years ahead of us in terms of value creation. But the great part about that is the great majority of it is just straight up leasing. And we've been getting 30% returns on capital and 30% you know, rent spread. So we'll do that all day long. Eventually, we will run out of it because we're going to lease it up. So we have this other opportunity down the road. So again, I think it's important that people understand that this will continue.

Thanks, John.

Thanks. Thanks, Loris.

Thank you. Our next question comes from Craig Mailman with Citi. Your line is open.

T. Guys I'm quickly on city center and I'm going back to the presentation. You guys did the end of October than a nary was that included in the headwinds that you had kind of pointed out for 24 Craig, I just to see that was not quoted again they they did they failed to renew at the end of November.

Craig, so we were in discussions with them, and our hope was that we were going to get them to renew, and it just didn't turn out that way, so they left at the end of November, which is why it didn't appear on our page in early November.

Yeah, and that was just a basic decision where they decided to close multiple New York area units, and that was the cause.

Hey, Craig, it's John. The only reason we're talking about this and calling it out, we wouldn't normally talk about one tenant, obviously. But you've got a situation here where you have one tenant, a very large tenant, like 80,000 square feet, and the rent is obviously significant if it's a two cent impact. So I think this is an aberration. I don't think. I know it's an aberration. And good thing is, as Tom said earlier, this is good real estate. It's hard to find a slot like this in a major metro market. And by the way, these guys were doing significant revenue. I mean, the rent structure didn't work for them. But the good news is, you know, we have a choice to make, not, you know, who's it going to be. We actually have a choice. So we feel good about it. It is what it is. It's very unique. And as I said, it's an aberration.

So the tenant that you're talking to, does it stay movie theater? And that's why maybe there's a, a potential that it could commence sometime in 24, or is it an alternative use?

It is an East Coast theater operator, and this unit went through a recent renovation. So in terms of conversion, to be able to open the store, you're down to projectors and some various FF&E items. So we are going to be able to turn this rent on very quickly.

Okay, great. Thank you.

Thank you. Our next question comes from Alex Goldfarb with Piper Sandler. Your line is open.

Hey, good afternoon out there. So two questions. First, the rating agencies, you know, looking at your metrics on page nine in the, you know, in the disclosures, you know, you're well within or well under all the different thresholds. So, you know, Clearly, BRICS finally got the rating agencies to upgrade them. So is your view that rating agencies are still thinking like death of retail, Amazon's going to kill everyone? Or is this just the slow pace, the glacial pace they move at? Or what's the feedback they're giving you for why otherwise your balance sheet improvements? I mean, John, you've been focused on cash flow growth since before COVID. What's their... What's the holdup that's keeping them where they are right now?

I don't think it's one size fits all, Alex. So going through each one, S&P, for example, it was just about them being slow. We finally convinced them to give us an improvement in our outlook. It's very rare for them to just go ahead and skip an entire grade. So they told us so long as we stick to our business plan over the next 12 to 18 months, that should mature into a full upgrade. That's around the same time it took for Bricksmore to mature from their upgrade in their outlook to a full upgrade in the rating. So again, we expect in about 12 months from now that that should change. Moody's had some staff changes. So they had someone there, his name was Phil Kibble. He worked there for a very long time. He left. We had sort of a temporary person in between, and now we've got a new person. And we're very optimistic based on recent discussions That will ultimately move them as well. Again, something we can't promise. But to your point, when you look at our ratings outlook and you compare it to some of our peers and you look at their ratings grid, it really doesn't make any sense, right? And, you know, yes, they're probably a little slow. to drop the narrative against retail, but I think we've gotten them there. So again, this whole thing, it's not a destination, it's a consistent journey. So we're constantly going to be talking to them, and once we get everyone at that BBB slash BA2 range, we're going to start pushing them for the next rating raise up, because honestly, if you look at our metrics, I think we're solidly in the BBB plus area.

Yeah, the only thing I'd add to that, the only thing I'd add, Alex, is I mean, clearly the fixed income community knew that, saw that. In some ways, you know, we're the beneficiary of that in the sense that, you know, the spread that we printed was a good spread, but not all the way where it should have been. But that's why we were 10 times oversubscribed. And so it's a process. But I think the most important thing that happened when we did the deal was was that there were a lot of people talking about the market, talking about opportunities, but our capital markets activities over the last three years have been spot on. Each deal we've done, each time we've made the decision, have been absolutely 100% great. And that is not by accident. This is something we talk about all the time. We do a ton of research. We're well versed in the capital markets. And we took advantage of that point in time and others didn't, right? And here we are in a volatile world again. So I think the team deserves a lot of credit for its forward thinking when it comes to capital markets and when it comes, you know, to capital deployment. Very important as well.

And I'm sure that they will use that at comp committee this coming year, John.

Second question is... I hope they do, Alex.

I suspect that your comp committee is not a pushover. Second question just goes to the same store guidance. For FFO, you guys came in, hit the street. The FFO was spot in despite normalization of bad debt, despite the White Plains movie theater, et cetera. But the same store is on the light side. So there definitely seems to be a disconnect, and it seems like the same store is not representative of what your portfolio is growing. And in fact, given the normalization of credit and the movie theater, your FFO guidance looks better than where it is. So what's going on with same store and why the disconnect between same store and what your portfolio is actually delivering?

Yeah, Alex, I can tell you there's not a disconnect in where we set our same store hangs together, where we set our FFO range. But as I explained in my opening remarks, there are certain, you know, discrete things that happen that's putting undue pressure on our same store. Probably the biggest one is it's bad debt. We only had 40 basis points of bad debt last year of total revenues. That's an all-time low for the company. And now with our guidance, we're setting it at 100 basis points at the midpoint. That's a 90 basis point drag on same store. We would have been at 2.4% at the midpoint had we had a normalized bad debt last year. So again, and plus we have pressure from the theater and we have pressure from Bed Bath and Beyond. So I think there should have been some expectation, especially in those numbers that we set forth past November. A lot of those line items were same store pressures as well. So again, you know, where our FFO is established and where our same store is established, those track. And, you know, our goal is this year, like we did last year, you know, last year we beat FFO by 11 cents. Our goal this year This is everything we can in our power. It's early. It's February. We're going to do whatever we can to exceed both on the same store line and on the FFO line. So, you know, it's early and, you know, this is where our guidance is set. That's where our same store is set, but we're optimistic.

But to your point, Heath, you're not seeing a change in the credit environment. Like the bad debt is just going back to sort of a normalized level. It's not like you see it going there anymore. It's just sort of a placeholder based on historic, right?

Historically, Alex, we run between 75 and 100 basis points of bad debt of total revenues. We set it at 100. So we set it at the high end of our historical range. Nothing is leading us to believe that we're going to be significantly higher in the historical range, but we thought that's the right place to set it. And we'll see where things end up.

Yeah, I mean, Alex, if you look at, obviously, fourth quarter, I mean, we're at a little over 70 basis points in the fourth quarter. Some of that's just going to be, you know, all that post-COVID stuff is worn off and we shouldn't be collecting as much as we were in the past from, you know, previous receivables. But, you know, 70 basis points in the fourth quarter, that's a very reasonable number. But again, beginning of the year, lots of things happening in the world. Under 100 base points at the midpoint was the prudent thing to do this feels like Groundhog Day. I remember this call a year ago. Talking about the prudence of guidance and and the way you go about it and the way you underwrite it. And maybe it's just how we operate here at this company, but we are very granular, but in the end. You know, it's very early in the year, and it's a dynamic world, a dynamic market. But, you know, our job is to outperform, Alex. You know that. That's what we're built on. So we look forward to the challenge. Thanks, John. Thanks, Heath. Thank you. Thanks.

Thank you. Our next question comes from Jeff Spector with Bank of America. Your line is open.

Great. Thank you. Can you hear me? We can. Hi, Jeff. Great. Great. Good afternoon. I wanted to discuss, you know, the leasing spend, John. You had mentioned the spend. I think it's through maybe the second half of 25 and the returns on that spend. I guess, you know, can we put that into context? Like how are those returns today versus historical and with the backdrop, right, the strength in demand? Again, how have you changed your mindset on when to spend, when not to spend?

Yeah, I mean, I think great question, Jeff. The returns are absolutely higher than they have been historically. But I would say that in the last, you know, post-COVID, there was some disruption. But then as we got footing, returns really accelerated. And I'm speaking for us right now. I don't really know what other people are doing in terms of returns. But, you know, we've always tried to be conservative when we lay out what we've accomplished and then what's out there still yet to do. So when you look at our investor presentation, there's that contrast between, you know, what we've already accomplished, the 26 boxes that we leased, and then what's left to do. But when I sit there and say we're getting 30% returns on capital, and 30% spreads, that's the world that we're actively engaged in right now. There's no reason to think that there would be a significant decline. But I'll be the first to admit, those are very high numbers. They're higher numbers than most of the peers. So it's not like we're just out there trying to get those numbers. We're out there trying to get the best possible tenant for the shopping center. And I think I made mention of that in the prepared remarks And it kind of is a thematic around, this is not a foot race. You know, we're, we're in a long-term value creation business. And if we can keep doing those deals and we spend 200, probably a little over 200 in the next two years to do that. Well, you can, you can imagine while we're so excited about AFFO and cashflow growth, when we get to the end of 25 and into 26, and then, you know, we're going to have tons of choices to deploy that capital, Jeff. And by the way, The balance sheet, at that point, if we don't deploy it and we just continue to plow it into the company in terms of bringing down debt, you're going to get your leverage down to the four times range. A lot of optionality there, but at this point in time, the market continues to avail itself to us in that regard.

Okay, thank you. And to confirm, it sounds like, again, focus on the lease up. not acquisitions, right? And development, of course, not acquisitions through 25?

Yeah, I mean, I think as I was saying when I laid out the plan for 24, clearly, you know, we're always in the market. We're always valuing what we own and valuing what's out there. So, you know, we will transact, you know, but it will be on the margin most likely. and we like to do it in a neutral way or a creative way. So that takes effort. It takes a lot of time, but that's what we've been able to do. But in terms of deploying capital into acquisitions that would go away, that would take away from our lease-up program, absolutely we will not be doing that.

Great. Thank you.

Thanks.

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

Yeah, I was wondering, can you talk a little bit about how you see build occupancy trending through 2024 and into 2025?

Listen, hi, Mike. We don't guide occupancy, but as you can imagine, you're going to see our leased and our occupied rates rise. We did describe in our opening remarks that you're going to continue to see an elevated snow pipeline and an elevated gap between our leased and our occupied because we do have quite a way to go until we're back at our sort of pre-COVID occupancy levels. But yeah, you're going to see us start to climb towards, you know, in 24 and through 25, climb back toward pre-COVID plus. in terms of both our leased and occupied rates.

Okay. And then I guess separately, I know you have a couple of redevelopments or expansion developments that you're wrapping up. I mean, what do you think the soonest could be that we would see you potentially activate something new on that front?

I think, as I just kind of said on that, when I was answering Jeff's question, which was, you know, Mike, that we want to be very focused on the lease-up platform and we've got, you know, a good enough sense of what's already, you know, in the hopper that, you know, what's already been signed and what's already being negotiated. That gives us, that's why we're basically saying we think we're going to spend $200 million-ish over the next two years. So as that kind of wanes, Then we lean into the next, you know, phase of growth, which is this embedded, you know, land value. And we've talked a lot about, you know, of all of the projects that we have available to us, one loud in Virginia is the one that we're probably the furthest along in terms of the design process and working on implementation and understanding what tenancy is. is available to us. And there's great opportunities there. And it's an incredible piece of real estate, which is, of course, why we will also highlight it on our foreign 24 tour. But I just want to emphasize that, you know, the returns on capital that we're getting in the lease up. And if you look at our occupancy, you know, versus the peer group, Fortunately, you know, we have more upside there. So that's why you're going to hear us talking about leasing and the returns versus, hey, I got to go buy something or I got to develop something. That's the point we're trying to get across.

Yeah, I would also add, listen, it maybe sounds less exciting not to describe to you this massive development pipeline that we have over the next five years, but honestly, Given, you know, $200 million over the next two years, I can't think of a better way to want to spend your money right now than to lease up your existing space. It's such an advantage, especially in this volatile environment, that we have a home at 25% to 30% returns to put our money to work. So, again, it doesn't sound, you know, it's the same thing we were doing last year. We'll be doing it into 24 and into 25, but it's a great place right now to be investing in your own space. Got it.

Yeah, I don't know that we touched on this part yet either, but, Mike, The other issue there is, you know, while we're doing this, while we're spending this $200 million, you know, we're still cash flowing and the cash flow is growing and our leverage is one of the lowest in the space and will go lower during this period of time. So if we wanted to, you know, could we go out and do three, $400 million of projects and go from five to five and a half? We could, but we don't think that's prudent right now in this environment. especially based on the returns. If things change and opportunities come to us, we have a lot of firepower, and it's only growing. So that's kind of the other thing that you should think about macro for us.

Got it. Okay. Makes sense. Thank you. Thank you.

Thank you. Our next question comes from Wes Galladay with Baird. Your line is open.

Hey, everyone. Maybe just a quick question on the non-same store pool. You did have some redevelopments and some recent developments in there. Should we expect that to grow much this year?

I don't think you'll see much changes in our non-same store pool, Wes.

I mean, from my NOI perspective, any, I guess, outsized growth there?

Some of our developments are starting to lease up, so you'll see some NOI contribution from some non-same-store property pool, but nothing major in that pool.

Okay, and then I believe your base case has about 80% retention in your investor presentation. What was retention last year? I believe it was running a little higher than that. In mid-80s. It was higher 80s, like 85, 86, so that's

Well, I mean, it's been running at 85 plus now for a bit. So it's another, the reason we called it out is it's conservative. And so again, when you're looking at an NAV page and we take a conservative 80% retention ratio, we don't include land and we don't include future lease up, that should show you there, you know, those numbers are very conservative. Got it. Thank you. Thanks. Thanks.

Thank you. As a reminder, if you'd like to ask a question, please press star 1-1. Our next question comes from Linda Sy with Jefferies. Your line is open.

Hi. You mentioned the $200 million in leasing and TI spending through 25. How does this number compare for just 24 versus 23?

Much higher. I mean, you know, when you look back in 23, we spent a little over $90 million which was high, but the year before we spent 60. These are round numbers. I would tell you a typical year is going to be between 40 and 60, depending on our lease percentage. So these numbers are well above, which is why we're pointing it out, Linda. And again, I mean, we can get into the details of how we got to that lease percentage, which was really driven by a couple of the anchor tenants. And we're already quickly making progress because when you look at Q4 over Q3, sequentially you see that we're growing in each category, so anchors and shops. So definitely it's elevated. That's why we're pointing it out. And then as we get into 26, it gets back to normal levels and even better after that. And again, this is assuming we maintain our traditional occupancy levels.

And then it seems like you had a lot of momentum in leasing and occupancy gains this quarter. Was there any pull forward demand away from 1Q or does that leasing volume that's elevated continue?

No, I mean, it's, you know, we had a lot of box deals in the quarter and we've always talked about, I think we did 10, right, in the quarter. The quarter before was all shops, you know, not all shops. But if you look at, that's why the numbers, when you look at our TI spend, move around a little bit because each quarter is a little different. But I don't feel like we're pulling forward. I think the demand is strong. Tom, do you want to?

Yeah, we see no change in demand. And I think it's pretty incredible that we signed 26 boxes in the year. And that is a significant number that we were able to pull off, and that's over half a million square feet. So if you look at our pipeline moving forward, it's as healthy as it was last year at this time. So the engines are still roaring to make sure we get back to some of our historical high levels.

I think even beyond just the sheer number of deals that we're doing, Linda, And again, I keep talking about the way we look at this. And we get one opportunity to release these bed-bath spaces. You get one opportunity. And we are very selective about what we're doing there. We're not just looking to slap someone in the box so we can say we've done 15 of the 20 or whatever the heck the number is. That's why I called out the kind of tenants that we've done business with that are going into these boxes, right? the Whole Foods, the Trader Joe's, the HomeSense, Sierra's, guys like that, and other people that we're negotiating with right now that are more grocers and more high-quality people. So the value creation there is really excellent, and that's why we're plodding away, but we're very excited about what we're getting done.

One last one. What's the mark to market on the $48 million in expiring ABR in 2024?

Well, I mean, I think if you look at the mark-to-market, actually, I would look even beyond that. If you look at over the next five years, this year's roll is pretty low. It's like less than 10%, I think, in terms of expirations. But then it ramps up. And if you look at that five-year period and you take an average over that five-year period and you compare it not to our current ABR, but the ABR over the trailing 12 months, there's real opportunity to mark to market there. So I would really kind of focus on that. I think the near term is kind of a, you know, we'll be fine. And there is some mark to market. But as you go out over the next five years, there was real opportunity there with elevated expirations.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to John Kite for any closing remarks.

Okay, well, thanks, everybody, for joining us. And for those of you who are going to be with us in Naples next week, we look forward to it. The weather looks good. Thank you.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day. you Thank you. Thank you. Bye. Thank you. you 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 will be a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded. I would now 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 NAREIT FFO of $1.93 per share at the midpoint with same-store growth of 2.5%. We delivered NAREIT 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 spend in check and provide more detail on each of our opportunities when appropriate. We expect acquisitions will be match 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.

Thank you, John. With the fourth quarter of 2023, KRZ earned 50 cents of NAE REIT FFO per share and $2.03 per share for the full year. During the quarter, same property NOI grew by 2.8%, primarily driven by 170 basis point increase in minimum rent and 120 basis point increase in net recoveries. For the full year, same property NOI growth was 4.8%, with primary contributors being higher minimum rent, all-time high overage rent, and lower bad debt. As John mentioned, we exceeded our original 2023 FFO guidance by 11 cents per share. Seven cents of the increase is related to operational outperformance in our same property pool. Two cents is attributable to properties outside the same property pool, with the remaining two cents related to the net impact of non-cash items, termination fees, and net transactional activity. We are establishing 2024 Navy FFO guidance of $2 to $2.06 per share included in our guidance of the following assumptions. A same property NOI growth range of one to 2% and a full year of bad debt assumption range of 75 to 125 basis points of total revenues. On page five of our fourth quarter investor presentation, we set forth a bridge to quantify the impact of year-over-year trends in our 2024 NAE REIT FFO guidance and the same property NOI growth assumption. It's important to note that but for the following three items, our 2024 same property growth assumption would have been 200 basis points higher at 3.5%. The net impact of the bankruptcy of Bed Bath & Beyond, the failure of a large theater tenant to renew its lease in November of last year, and during 2023, the company experienced a historically low level of bad debt at 42 basis points of revenue, while the midpoint of our bad debt assumption for our 2024 guidance is set at 100 basis points of total revenues. Taking a longer-term view on growth, from 2021 through the midpoint of our 2024 guidance, our FFO CAGR is anticipated to be 10.6%, and our average annualized same property NOI growth is anticipated to be 4.4%. Also, it's worth noting that from 2021 through 2023, our dividend CAGR was 18.8%. Our net debt to EBITDA stands at 5.1 times, which remains at the lower end of our long-term target. Additionally, our debt service coverage ratio remains above five times, and we have over 1.1 billion of liquidity. Subsequent to quarter end, KRG returned to the public debt market by issuing a 10-year, $350 million bond at 5.5%. The fact that we were more than 10 times oversubscribed was not by accident. We spent a year reintroducing KRG to the fixed income community and successfully navigated a very tight issuance window. While we are very pleased with the execution and demand, we see an opportunity for further spread compression as our bonds become more liquid and our ratings improve. Proceeds from the bond will be used to satisfy all of our 2024 debt maturities when they come due at the end of June. In the meantime, we have the proceeds invested in an account earning interest in excess of the yield on the maturing debt. Thank you to the fixed income community for effectively re-rating our cost of debt to levels that are more reflective of the state of our credit metrics. As John mentioned, we look forward to showcasing our Naples portfolio at our first 424 event next week. The dates of the next three installments in Dallas, D.C., and Las Vegas are available on our website. Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. If you'd like to ask a question, please press star 1-1. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 1-1 again. Our first question comes from Todd Thomas with KeyBank Capital Markets. Your line is open.

Hi, thanks. Good afternoon. A couple questions. First, in the guidance, you included two cents related to the theater at City Center, which closed late last year. Can you just speak about plans to backfill that space, which I think it's a third floor space, and just talk about, you know, if you could just give us an update on that and sort of the opportunity to backfill that.

Sure, Todd. This is Tom. So we embarked on a process of trying to bring in four to five potential users. We have now broken that down into one that we're focusing on very aggressively. I had calls with them yesterday. So our hope is to try to bring them in with an executed lease by the end of the first quarter. And based upon the condition of the space, we should be in a position to commence rent very aggressively. So we have moved through that process in an expeditious manner. So we should be ready to go by the end of March.

Okay. And Heath, the two cent impact, does that assume any commencement during the year or is that basically assume the space is vacant throughout the year in its entirety?

That assumes that the space is vacant, Todd. So any rent that Tom can turn on this year is going to be incremental to our guidance.

Okay. And then the expense recovery rate increased in the quarter. It was above 92%. I know you've focused on efforts to transition tenants and sign new leases with fixed CAM provisions. How should we think about that expense recovery rate moving forward? I guess what's assumed year over year in terms of the impact from net recoveries in the same store forecast?

Yeah, so Todd, both of those numbers of the NOI margin and the recovery ratio were a little higher this quarter. Part of its timing, part of it was we did better on real estate tax assessment challenges. We got a real estate tax refund that was related to a prior period. So I would tell you that right now we're sort of normalizing in the NOI margins in the mid-70s. And the recovery ratio in the high 80s is sometimes approaching 90. But again, as we start signing up more and more of this fixed cam in our leases, this is going to be the gift that keeps on giving over time. Those numbers are going to continue to crawl up, again, as we get more people on fixed cam.

Okay, great. All right, thank you.

Thank you. Our next question comes from Flores Van Dykem with CompassPoint. Your line is open.

Hey, guys. Thanks for taking my question. I gather there is a bit of conservatism. Both John and Heath sort of alluded to that in your initial guidance, which is always good, but it can scare people a little bit sometimes. Maybe, you know, John, I would love to hear your thoughts on you know, the significant transformation that has occurred at KRG over the last, you know, call it, you know, six, seven years, maybe in terms of portfolio quality, and I think Heath sort of alluded to it in terms of, you know, the balance sheet as well. What do you think, in your view, what are the biggest transformational changes that you have seen And what does that mean for growth going forward?

Well, actually, Flores, I think, you know, if you look at our investor presentation, you know, there's a handful of pages in there that are really important. And one of them is page eight, which kind of shows you the metrics and the growth that's occurred and the improvement and the quality of the portfolio that's occurred since 2019. And it's pretty easy to look at that when you look at our ABR growth, you look at our blended cash rent spreads, and you look at our FFO CAGR since 2019 over that period of time against a few select peers of the bigger peers. I mean, we've outperformed. We've been number one in each category. you know, the transformation has been massive, um, and it's happened very quickly. And maybe people, you know, I understand that the intro to your question in terms of guidance, um, you know, it's, it's, uh, what is it? February. So it's very early in the year. This is, this is how we approach it. We look at every variable, um, and there's a lot of them. And again, this is a portfolio in transition. Um, But as we laid out in the prepared remarks, the upside here is very substantial. And that's just mathematics. That's just the metric upside. The upside in getting people to understand the quality is the other thing that we have to focus on, maybe even more so. Because it's happened so quickly and people maybe haven't been able to really get out there and see the assets. And I know you've, you know, we've spent some time together on the ground So I think you understand what I'm talking about. It's not just the assets, but it's the relative quality of these assets as compared to peers with much higher multiples and lower cap rates. So it's a question that I could probably talk to you for an hour about, but the reality is the portfolio has changed, you know, dramatically. It's improved dramatically. And our people have improved dramatically who are executing this plan. So long story short, it's just way better. And I think the metrics make it clear.

Thanks, Sean. Maybe, Heath, maybe if you can touch on, you know, a couple of things presumably that you have in your back pocket. I know that you have a a big portfolio of non-income producing land. Maybe, you know, are you seeing some demands from investors on some of those land sites? And then maybe if you can also update us on what's happening in California in the other theater that you had there that I think you're looking to re, you know, entitled to a different use.

Hey, Flores, it's John. Let me start that real quick, though, on the land. I want to be clear what we're doing there because, you know, it's very important that the market understand. We have an entitled land bank that has significant value that when you, again, go back to our investor presentation and look at the page that goes through NAV, I think which is page, I'm turning it right now, page 7. you'll see that we're not including that in how we're kind of handicapping, you know, stock prices. That being said, it doesn't mean that we're not working on it. It doesn't mean that we're not actively engaged in having that be the next level of upside. And, you know, we've been pretty clear about that, that we are going to be CapEx lite, in the development program while we're spending $200 million at very, very high returns in the leasing program. So I wanted to give you that basis before we dug into anything particularly specific. But again, I think it's just another area that is very misunderstood in the sense of what we're doing to prepare to create that value. But Tom, you want to?

Yeah. So if you take a look at our supplement, there's seven properties that are identified. And then in addition to that, we have Legacy and Lakewood that are also on our list. So if you take a look at those nine properties, we have about 76 acres that are able to be developed. And they would be developed in a form of different styles and different approaches with JVs, maybe a potential sale, ground leases. So we're being very thoughtful of the best way to do that. But if you take a look at apartment, you know, apartment counts that can be done there, retail, office, et cetera, it offers a lot of opportunities as we're moving forward. And that's going to be a big goal as we move into 24 is moving those to the next level to be in an income generation position.

And the movie theater in California?

Yeah. So on the movie theater in California, it's Ontario, a little bit east of LA. We're in the process of moving forward with a rezoning process. And that rezoning objective is to ultimately put the property in a position to sell to various multifamily developers. So we're making great progress there, but You know, it's a situation that it could at some point generate 800 multifamily units in an area that is very much starved for that type of housing.

I mean, you know, the thing about that, Flores, we already today have an economic interest in just under 1,700 units that are open and operating today. And, you know, the one Loudoun project alone is another 1700 units of potential growth. But I want to be clear. And so, you know, the reason we don't bring up Ontario is it's a long process. It's got to get rezoned. But the value creation is enormous, as you might imagine. So, I think it all kind of comes back to the thematic that we have an incredible next couple of years ahead of us in terms of value creation. But the great part about that is the great majority of it is just straight up leasing. And we've been getting 30% returns on capital and 30% you know, rent spread. So we'll do that all day long. Eventually, we will run out of it because we're going to lease it up. So we have this other opportunity down the road. So again, I think it's important that people understand that this will continue.

Thanks, John.

Thanks. Thanks, Flores.

Thank you. Our next question comes from Craig Mailman with Citi. Your line is open.

I'm quickly on city center and I'm going back to the presentation. You guys did the end of October than a nary was that included in the headwinds that you had kind of pointed out for 24 The correct.

Hi, this is he that was not quoted again they they did they failed to renew at the end of November. Craig, so we were in discussions with them, and our hope was that we were going to get them to renew, and it just didn't turn out that way, so they left at the end of November, which is why it didn't appear on our page in early November.

Yeah, and that was just a basic decision where they decided to close multiple New York area units, and that was the cause.

Hey, Craig, it's John. The only reason we're talking about this and calling it out, we wouldn't normally talk about one tenant, obviously. But you've got a situation here where you have one tenant, a very large tenant, like 80,000 square feet, and the rent is obviously significant if it's a two cent impact. So I think this is an aberration. I don't think. I know it's an aberration. And good thing is, as Tom said earlier, this is good real estate. It's hard to find a slot like this in a major metro market. And by the way, these guys were doing significant revenue. I mean, the rent structure didn't work for them. But the good news is, you know, we have a choice to make, not, you know, who's it going to be. We actually have a choice. So we feel good about it. It is what it is. It's very unique. And as I said, it's an aberration.

So the tenant that you're talking to, does it stay movie theater? And that's why maybe there's a, a potential that it could commence sometime in 24, or is it an alternative use?

It is an East Coast theater operator, and this unit went through a recent renovation. So in terms of conversion, to be able to open the store, you're down to projectors and some various FF&E items. So we are going to be able to turn this rent on very quickly.

Okay, great. Thank you.

Thank you. Our next question comes from Alex Goldfarb with Piper Sandler. Your line is open.

Hey, good afternoon out there. So two questions. First, the rating agencies, you know, looking at your metrics on page nine in the, you know, in the disclosures, you know, you're well within or well under all the different thresholds. So, you know, Clearly, BRICS finally got the rating agencies to upgrade them. So is your view that rating agencies are still thinking like death of retail, Amazon's going to kill everyone? Or is this just the slow pace, the glacial pace they move at? Or what's the feedback they're giving you for why otherwise your balance sheet improvements? I mean, John, you've been focused on cash flow growth since before COVID. What's their What's the holdup that's keeping them where they are right now?

I don't think it's one size fits all, Alex. So going through each one, S&P, for example, it was just about them being slow. We finally convinced them to give us an improvement in our outlook. It's very rare for them to just go ahead and skip an entire grade. So they told us, so long as we stick to our business plan over the next 12 to 18 months, that should mature into a full upgrade. That's around the same time it took for Bricksmore to mature from their upgrade in their outlook to a full upgrade in the rating. So again, we expect in about 12 months from now that that should change. Moody's had some staff changes. So they had someone there, his name was Sil Kibble. He worked there for a very long time. He left. We had sort of a temporary person in between, and now we've got a new person. And we're very optimistic based on recent discussions that will ultimately move them as well. Again, something we can't promise. But to your point, when you look at our ratings outlook and you compare it to some of our peers and you look at their ratings grid, it really doesn't make any sense, right? And yes, they're probably a little slow, to drop the narrative against retail, but I think we've gotten them there. So again, this whole thing, it's not a destination, it's a consistent journey. So we're constantly going to be talking to them, and once we get everyone at that BBB slash BA2 range, we're going to start pushing them for the next rating raise up, because honestly, if you look at our metrics, I think we're solidly in the BBB plus area.

Yeah, the only thing I'd add to that, the only thing I'd add, Alex, is I mean, clearly the fixed income community knew that, saw that. In some ways, you know, we're the beneficiary of that in the sense that, you know, the spread that we printed was a good spread, but not all the way where it should have been. But that's why we were 10 times oversubscribed. And so it's a process. But I think the most important thing that happened when we did the deal was was that there were a lot of people talking about the market, talking about opportunities, but our capital markets activities over the last three years have been spot on. Each deal we've done, each time we've made the decision have been absolutely 100% great. And that is not by accident. This is something we talk about all the time. We do a ton of research. We're well versed in the capital markets. And we took advantage of that point in time and others didn't, right? And here we are in a volatile world again. So I think the team deserves a lot of credit for its forward thinking when it comes to capital markets and when it comes, you know, to capital deployment. Very important as well.

And I'm sure that they will use that at comp committee this coming year, John.

Second question is... I hope they do, Alex.

I suspect that your comp committee is not a pushover. Second question just goes to the same store guidance. For FFO, you guys came in, hit the street. The FFO was spot in despite normalization of bad debt, despite the White Plains movie theater, et cetera. But the same store is on the light side. So there definitely seems to be a disconnect. And it seems like the same store is not representative of what your portfolio is growing. And in fact, given the normalization of credit and the movie theater, your FFO guidance looks better than where it is. So what's going on with same store and why the disconnect between same store and what your portfolio is actually delivering?

Yeah, Alex, I can tell you there's not a disconnect in where we set our same store hangs together, where we set our FFO range. But as I explained in my opening remarks, there are certain, you know, discrete things that happen that's putting undue pressure on our same store. Probably the biggest one is it's bad debt. We only had 40 basis points of bad debt last year of total revenues. That's an all-time low for the company. Now with our guidance, we're setting it at 100 basis points at the midpoint. That's a 90 basis point drag on same store. We would have been at 2.4% at the midpoint had we had a normalized bad debt last year. So again, and plus we have pressure from the theater and we have pressure from Bed Bath and Beyond. So I think there should have been some expectation, especially in those numbers that we set forth past November. A lot of those line items were same store pressures as well. So again, where our FFO is established and where our same store is established, those track. And our goal is this year, like we did last year, last year we beat FFO by 11 cents. Our goal this year This is everything we can in our power. It's early. It's February. We're going to do whatever we can to exceed both on the same store line and on the FFO line. So, you know, it's early and, you know, this is where our guidance is set. That's where our same store is set, but we're optimistic.

But to your point, Heath, you're not seeing a change in the credit environment. Like the bad debt is just going back to sort of a normalized level. It's not like you see it going there anymore. It's just sort of a placeholder based on historic, right?

Historically, Alex, we run between 75 and 100 basis points of bad debt of total revenues. We set it at 100. So we set it at the high end of our historical range. Nothing is leading us to believe that we're going to be significantly higher in the historical range, but we thought that's the right place to set it. And we'll see where things end up.

Yeah, I mean, Alex, if you look at, obviously, fourth quarter. I mean, we're at a little over 70 basis points in the fourth quarter. Some of that's just going to be, you know, the, the, all that post COVID stuff is worn off and we should, we shouldn't be collecting as much as we were in the past from, you know, previous receivables, but you know, 70 basis points in the fourth quarter, that's a very reasonable number. But again, beginning of the year, lots of things happening in the world. 100 base points at the midpoint was the prudent thing to do. This feels like Groundhog Day. I remember this call a year ago talking about the prudence of guidance and the way you go about it and the way you underwrite it. And maybe it's just how we operate here at this company, but we are very granular. But in the end, You know, it's very early in the year, and it's a dynamic world, a dynamic market. But, you know, our job is to outperform, Alex. You know that. That's what we're built on. So we look forward to the challenge. Thanks, John. Thanks, Heath. Thank you. Thanks.

Thank you. Our next question comes from Jeff Spector with Bank of America. Your line is open.

Great. Thank you. Can you hear me? We can. Jeff. Great. Great. Good afternoon. I wanted to discuss the leasing spend, John. You had mentioned the spend. I think it's through maybe the second half of 25 and the returns on that spend. Can we put that into context? How are those returns today versus historical and with the backdrop, the strength in demand? Again, how have you changed your mindset on when to spend, when not to spend?

Yeah, I mean, I think great question, Jeff. The returns are absolutely higher than they have been historically. But I would say that in the last, you know, post-COVID, there was some disruption. But then as we got footing, returns really accelerated. And I'm speaking for us right now. I don't really know what other people are doing in terms of returns. But, you know, we've always tried to be conservative when we lay out what we've accomplished and then what's out there still yet to do. So when you look at our investor presentation, there's that contrast between, you know, what we've already accomplished, the 26 boxes that we leased, and then what's left to do. But when I sit there and say we're getting 30% returns on capital, and 30% spreads, that's the world that we're actively engaged in right now. There's no reason to think that there would be a significant decline. But I'll be the first to admit, those are very high numbers. They're higher numbers than most of the peers. So it's not like we're just out there trying to get those numbers. We're out there trying to get the best possible tenant for the shopping center. And I think I made mention of that in the prepared remarks And it kind of is a thematic around this is not a foot race. You know, we're in a long-term value creation business. And if we can keep doing those deals and we spend 200, probably a little over 200 in the next two years to do that, well, you can imagine why we're so excited about AFFO and cash flow growth when we get to the end of 25 and into 26. And then, you know, we're going to have tons of choices to deploy that capital, Jeff. And by the way, The balance sheet, at that point, if we don't deploy it and we just continue to plow it into the company in terms of bringing down debt, you're going to get your leverage down to the four times range. A lot of optionality there, but at this point in time, the market continues to avail itself to us in that regard.

Okay, thank you. And to confirm, it sounds like, again, focus on the lease up. not acquisitions, right? And development, of course, not acquisitions through 25. Yeah.

I mean, I think, I think as I was saying, when I laid out the plan for 24, clearly, you know, we're always in the market. We're, we're always, we're always valuing what we own and valuing what's out there. So, you know, we will transact, you know, but it will be on the margin most likely. and we like to do it in a neutral way or a creative way. So that takes effort. It takes a lot of time, but that's what we've been able to do. But in terms of deploying capital into acquisitions that would go away, that would take away from our lease-up program, absolutely we will not be doing that.

Great. Thank you.

Thanks.

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

Yeah, I was wondering, can you talk a little bit about how you see build occupancy trending through 2024 and into 2025?

um listen hi mike we don't guide the occupancy but as you can imagine you're going to see our lease and our occupied rates rise we did describe in our opening remarks that you're going to continue to see an elevated snow pipeline and an elevated gap between our lease and our occupied because we do have quite a way to go until we're back at our sort of pre-covered occupancy levels but yeah you're gonna you're gonna see us start to climb um towards you know uh in 24 and 325 climb back toward uh pre-covered plus in terms of both our leased and occupied rates.

Okay. And then I guess separately, I know you have a couple of redevelopments or expansion developments that you're wrapping up. I mean, what do you think the soonest could be that we would see you potentially activate something new on that front?

I think, as I just kind of said on that, when I was answering Jeff's question, which was, you know, Mike, that we want to be very focused on the lease up platform and we've got, you know, a good enough sense of what's already, you know, in the hopper that, you know, what's already been signed and what's already being negotiated. That gives us, that's why we're basically saying we think we're going to spend 200 million-ish over the next two years. So as that kind of wanes, Then we lean into the next, you know, phase of growth, which is this embedded, you know, land value. And we've talked a lot about, you know, of all of the projects that we have available to us, one loud in Virginia is the one that we're probably the furthest along in terms of the design process and working on implementation and understanding what tenancy is available to us and there's great opportunities there and it's an incredible piece of real estate, which is of course why we will also highlight it on our foreign 24 tour. But I just want to emphasize that, you know, the, the returns on capital that we're getting in the lease up and, and if you look at our occupancy, you know, versus the peer group, Fortunately, you know, we have more upside there. So that's why you're going to hear us talking about leasing and the returns versus, hey, I got to go buy something or I got to develop something. That's the point we're trying to get across.

Yeah, I would also add, listen, it maybe sounds less exciting not to describe to you this massive development pipeline that we have over the next five years, but honestly, Given, you know, $200 million over the next year, I can't think of a better way to want to spend your money right now than to lease up your existing space. It's such an advantage, especially in this volatile environment, that we have a home at 25% to 30% returns to put our money to work. So, again, it doesn't sound, you know, it's the same thing we were doing last year. We'll be doing it into 24 and into 25, but it's a great place right now to be investing in your own space. Got it.

Yeah, I don't know that we touched on this part yet either, but Mike, The other issue there is, you know, while we're doing this, while we're spending this $200 million, you know, we're still cash flowing and the cash flow is growing and our leverage is one of the lowest in the space and will go lower during this period of time. So if we wanted to, you know, could we go out and do three, $400 million of projects and go from five to five and a half? We could, but we don't think that's prudent right now in this environment. especially based on the returns. If things change and opportunities come to us, we have a lot of firepower, and it's only growing. So that's kind of the other thing that you should think about macro for us.

Got it.

Okay. Makes sense. Thank you.

Thank you.

Thank you. Our next question comes from Wes Galladay with Baird. Your line is open.

Hey, everyone. Maybe just a quick question on the non-same store pool. You did have some redevelopments and some recent developments in there. Should we expect that to grow much this year?

I don't think you'll see much changes in our non-same store pool, Wes.

I mean, from my NOI perspective, any, I guess, outsized growth there?

Some of our developments are starting to lease up, so you'll see some NOI contribution from some non-same-store property pool, but nothing major in that pool.

Okay, and then I believe your base case has about 80% retention in your investor presentation. What was retention last year? I believe it was running a little higher than that. In mid-80s.

It was higher 80s, like 85, 86, so that's Wes, I mean, it's been running at 85 plus now for a bit. So it's another, the reason we called it out is it's conservative. And so again, when you're looking at an NAV page and we take a conservative 80% retention ratio, we don't include land and we don't include future lease up, that should show you there, you know, those numbers are very conservative. Got it. Thank you. Thanks.

Thank you. As a reminder, if you'd like to ask a question, please press star 1-1. Our next question comes from Linda Sy with Jefferies. Your line is open.

Hi. You mentioned the $200 million in leasing and TI spending through 25. How does this number compare for just 24 versus 23?

Much higher. I mean, you know, when you look back in 23, we spent a little over $90 million which was high, but the year before we spent 60. These are round numbers. I would tell you a typical year is going to be between 40 and 60, depending on our lease percentage. So these numbers are well above, which is why we're pointing it out, Linda. And again, I mean, we can get into the details of how we got to that lease percentage, which was really driven by a couple of the anchor tenants. And we're already quickly making progress because when you look at Q4 over Q3, sequentially you see that we're growing in each category, so anchors and shops. So definitely it's elevated. That's why we're pointing it out. And then as we get into 26, it gets back to normal levels and even better after that. And again, this is assuming we maintain our traditional occupancy levels.

And then it seems like you had a lot of momentum in leasing and occupancy gains this quarter. Was there any pull forward demand away from 1Q or does that leasing volume that's elevated continue?

No, I mean, it's, you know, we had a lot of box deals in the quarter and we've always talked about, I think we did 10, right, in the quarter. The quarter before was all shops, you know, not all shops. But if you look at – that's why the numbers, when you look at our TI spend, move around a little bit because each quarter is a little different. But I don't feel like we're pulling forward. I think the demand is strong. Tom, do you want to?

Yeah, we see no change in demand, and I think it's pretty incredible that we signed 26 boxes in the year. And, you know, that is a significant number that we were able to pull off, and, you know, that's over half a million square feet. So, you know, if you look at our pipeline moving forward, it's as healthy as it was last year at this time. So, you know, the engines are still roaring to make sure we get back to some of our historical high levels.

I think even beyond just the sheer number of deals that we're doing, Linda, And again, I keep talking about the way we look at this, and we get one opportunity to release these bed-bath spaces. You get one opportunity. And we are very selective about what we're doing there. We're not just looking to slap someone in the box so we can say we've done 15 of the 20 or whatever the heck the number is. That's why I called out the kind of tenants that we've done business with that are going into these boxes, right? the Whole Foods, the Trader Joe's, the HomeSense, Sierra's, guys like that, and other people that we're negotiating with right now that are more grocers and more high-quality people. So the value creation there is really excellent, and that's why we're plodding away, but we're very excited about what we're getting done.

One last one. What's the mark to market on the $48 million in expiring ABR in 2024?

Well, I mean, I think if you look at the mark-to-market, actually, I would look even beyond that. If you look at over the next five years, this year's roll is pretty low. It's like less than 10%, I think, in terms of expirations. But then it ramps up. And if you look at that five-year period and you take an average over that five-year period and you compare it not to our current ABR, but the ABR over the trailing 12 months, there's real opportunity to mark to market there. So I would really kind of focus on that. I think the near term is kind of a, you know, we'll be fine, and there is some mark to market. But as you go out over the next five years, there was real opportunity there with elevated expirations.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to John Kite for any closing remarks.

Okay, well, thanks, everybody, for joining us. And for those of you who are going to be with us in Naples next week, we look forward to it. The weather looks good. Thank you.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.