Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Kite Realty Group Trust Earnings Conference Call. At this time, all participant lines are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference maybe recorded. I'd now like to hand the conference over to your host today, Mr. Brian McCarthy, Senior Vice President, Marketing and Communications.
Please go ahead.
Thank you, and good morning, everyone. Welcome to Kite Realty Group's 2nd 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 10 Q.
Today's remarks also include certain non GAAP financial measures. Please refer to yesterday's earnings press release available on our website for a 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 McGow 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, Jason Colton. I will now turn the call over to John.
Thanks, Brian, and good morning, everyone. Thank you for joining us today. KRG family appreciates this continues to be a challenging time for everyone, including our investors, tenants, customers and vendors. I hope this call finds you all doing well. With the global scientific community racing towards a variety of solutions to the COVID-nineteen pandemic, we're feeling incrementally more optimistic as compared to our last earnings call.
As always, our goal is to provide as much transparency and color as possible within the context of the information we have to date. With that in mind, we'll spend some of the time today discussing the short term dislocation and our rent collection activities during the Q2 and for July. As for the long term impacts of this pandemic, the unknowns, especially as it relates to the timing of a solution still outweigh the knowns. But we are starting to see some encouraging green shoots and emerging trends that present potential long term opportunities for our business. Prior to the past March, we could have never imagined an environment where monthly rent collection rates would serve as a proxy for portfolio quality and management team determination.
As of today, we've collected 80% of our 2nd quarter gross rent, which grows to 82% when applying security deposits. An additional 9% of our 2nd quarter gross rent have been contractually deferred. Therefore, we have 91% 2nd quarter gross rent addressed, which speaks volumes on how retailers view the necessity of staying in our real estate. As for July, we've collected 87% of gross rent to date, along with another 2% in deferral agreements. We're pleased with our sector leading collection performance as a look through to the portfolio transformation that took place last year, the tenacity of the KRG team and the depth of our tenant relationships.
With that in mind, I can assure you we will continue to maximize collections. As of today, 94% of our ABR is open and operating in some capacity, up from approximately 51% in April. With respect to the remaining 6% that are closed, 3% have not been able to reopen due to local restrictions, including some of our gym and theater Approximately 3% of our tenants have chosen not to reopen. And in some instances, the tenant is unable to hire back the staff or the tenant has made the determination that is unprofitable to operate until such time as further regulations are lifted. So what's this all mean for the longer term prospects of our business?
As I mentioned earlier, it's too early to answer that question with any level of conviction. We are, however, beginning to see some silver linings that we think bode well for KRG and for the Open Air retail sector. As the pandemic began to take hold in March, predictably leasing came to a screeching halt. As the quarter progressed and the world was able to grasp the weight of the pandemic, leasing discussions restarted and successful retailers continued their quest for additional and or better locations. The Q2, despite the disruption, we signed 35 leases for 302,000 square feet with comparable leases resulting in a blended cash and GAAP rent spreads of 19.9% and 29.3%, respectively.
One key metric to consider is the spread on non option renewals, which is what tenants are willing to pay to stay in their current space. In the Q2, we signed 15 non option renewals for an average 12% cash rent spread. These tenants in the middle of a pandemic decided to pay 12% more in rent to remain in their space, another testament to owning properties where retailers want to be located. I'd like to now shift to what I believe will be 4 long term trends in retail real estate. These changes had already been happening, but the pandemic has accelerated their realization.
Each of these will be positive for high quality retail real estate, particularly in our Open Air portfolio. First, the demise of struggling retailers has accelerated. As we've seen, the pandemic has pushed some struggling retailers to close their doors. While disruptive in the short term, this is a positive in the long term. It will allow for the replacement of zombie retailers with new active growing concepts.
Good real estate will benefit as new retailers flock to fill vacancies left from failed retailers. This is not new to retail real estate as new concepts have replaced old outdated retailers for decades. 2nd, retailers have ramped up their omnichannel abilities. Many retailers had already realized that omnichannel was the best way to accelerate sales, but the pandemic has made the majority of those not quite convinced realize they need to fully invest in their omni channel capabilities. There are many reasons why retailers need both physical stores and an online presence to maximize their sales.
Our investor presentation outlines these reasons in more detail. 3rd, buy online pickup in store has spiked during the pandemic and expanded to curbside pickup. Larger retailers had already started to implement BOPUS as a more profitable way to sell goods. There are no shipping costs, reduced checkout costs and the opportunity for the customer to buy additional items during the visit. One byproduct of our socially distanced world is that many consumers have experienced BOPUS and the ease at which open air centers enable customers to quickly fulfill their purchases.
We believe the ability for customers to purchase items online, drive up to the store and quickly get their goods is here to stay. To that end, KRG has created designated order pickup areas at most of our centers to assist retailers in their ability to fulfill buy online and pickup in store and curbside orders. Our tenants in turn have gotten increasingly creative by pushing electronic advertisements and coupons to create additional sales while the customer is in the center. It's also important to note that this type of fulfillment is particularly suited for our Open Air Real Estate. This brings me to the final observation.
Going forward, we anticipate that the rosters of retailers looking for space in our centers will grow. Based on conversations we've had with multiple large national retailers, there's a renewed focus on speed and convenience as essential ingredients to a successful omni channel strategy. These retailers are also focused on the additional foot traffic that would result in being in a conveniently located open air center, particularly one with a grocery component. In addition to convenience, we're able to offer these retailers attractive rents and common area charges, thereby improving their margins. This pandemic has been the most disruptive global event that I've witnessed.
Its ability to slowly grind away our collective patience and generate unprecedented levels of personal and professional stress is second to none. At KRG, we keep reminding ourselves that disruption breeds opportunity and amidst the chaos, we have made a conscious effort to channel our short term frustrations towards unlocking those long term opportunities. I'll now turn the call over to Heath to discuss the balance sheet and our current capital situation.
Thank you, John, and good morning, everyone. As was the case last quarter, KRG continues to maintain a strong balance sheet and our posture remains cautious with a focus on capital preservation. That being said, we are feeling incrementally more confident about the business as evidenced by our decision to reduce our outstanding line of credit balance to $100,000,000 As of June 30, our net debt to EBITDA was 7.1x, elevated due to the impact of the COVID pandemic. Please note that we calculate NDE by annualizing our most recent quarter of EBITDA. Therefore, the disruption caused by COVID will immediately peer in our NDA NDE metric.
More importantly though, our liquidity position remains strong with no debt maturing until 2022, only $9,400,000 committed to development projects and the big box surge with approximately $584,000,000 of liquidity available to KRG. Our capital allocation discipline is evident in our latest redevelopment disclosure. As further detailed in the supplement, this past quarter, we entered into a joint venture to pursue a multifamily opportunity at Glendale Town Center. We are partnering with a local developer to build 2 67 apartment units on an unused parcel of land adjacent to the center. In exchange with the contribution of land, KRG secured a 12% interest in the venture.
The best part about this redevelopment is that our future capital contribution is limited to site preparation costs. Given the recent dislocation, we think it's important to provide clarity on the bad debt. After examining all of our outstanding balances, tenant by tenant, we are reserving $6,600,000 of accounts receivable for the 2nd quarter. Of that total number, $4,900,000 is related to 2nd quarter billings that we are estimating are unlikely to be collected. $870,000 is related to balances that were outstanding at the end of the Q1 that we now deem uncollectible.
The remaining $880,000 is related to noncash straight line rent reserves that have already been recognized in income, but most likely will not be collected through contractual rent bumps going forward. This is all detailed on Page 17 of our supplemental. As a reminder, primarily due to COVID, we took a $3,600,000 bad debt charge in the Q1. We are far from out of this crisis, and we remain very guarded with our capital. While we are actively looking for opportunities that may come out of this distress, we would be hard pressed to pursue anything that will be detrimental to our strong capital and liquidity positions.
Thank you to everyone for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.
Our first question comes from Alexander Goldfarb with Piper Sandler. Your line is now open.
Hey, good morning out there. So
first
hey, good morning. The PowerPoint that you guys put out has a lot of good stuff. So thank you for whoever spent time on that or weekend. I appreciate it. The other thing that what's that?
I said absolutely. We thank Jason mostly for that.
Okay. Jason, thank you. And then the other thing that just continues to be impressive is the fact that your movie theaters last quarter and this quarter, even though they're all closed, there's still like a good amount of paying rent, which is just really impressive. But let me get to my questions. First, just big picture, you guys had great rent collections.
You have good great balance sheet, limited CapEx needs. You felt comfortable reducing your line of credit balance. Where do you stand on the dividend? And where do you think your taxable income will be this year relative to your need to restore the dividend this year?
Sure. Well, I think kind of like last quarter in our conversation, Alex, I mean, we're going to continue to see how the quarter plays out. So we will continue to see how the next 2 months evolve before we make a decision on the Q3. That said, as we mentioned, we were incrementally more positive this quarter and we've been doing quite well with our initiatives. So we feel good about that.
But we still as we also pointed out, we still can't really predict where this goes in the balance of this year. So we'll continue to maintain a conservative stance. That said, we are working through our taxable income projections, and that remains a key element of what we will ultimately do. So too early to obviously say what it would be right this minute. But when we discuss with the Board in an upcoming Board meeting, we'll be talking about all the things that we just laid out, which is our view of the health of our retailers, the cash flow, etcetera.
So I think we feel good that the decision we made in the last quarter as related to paying a small amount relative to our projected kind of a portion of our projected taxable income, that's going to adjust somewhat when we look at the next at this quarter and next quarter.
Okay. And then as far as the second wave, the COVID outbreak that especially came across a number of your Sunbelt markets during the quarter and subsequent. Did you guys see any impact? Was there any like did tenants slowdown leasing discussions? Were sales impacted?
Were your centers impacted? Or as these waves swept through some of your markets in Florida, Texas, etcetera, your portfolio really didn't notice a difference?
Well, I can't comment on waves because I'm not quite certain that I would suggest that it's a wave versus just an extension of what was already there. But initially, there was a lot of focus and particularly media focus on Texas and Florida maybe 3 weeks ago. But quite frankly, the massive strain on the hospital systems that was projected didn't materialize really from our view in a way that really, really changed people's daily lives. So I think as it relates to particularly Florida and Texas, which is where we were potentially most impacted, we really did not see that. And as people have become more accustomed to going out about their daily routines, I think frankly, in our particular locations, people have taken fairly robustly to wearing masks and feeling a little more comfortable in going out doing their daily thing.
And so we benefited from that. So we really did not see significant pullback in any way. Certainly, discussions about where could that happen. But look, it's early yet on that. That's why I don't want to suggest that there this was a wave that has now gone down.
The reality is this will continue to be with us for quite a while. And we are thinking that our the strength of our real estate really came to fruition here. And the things that we did last year with Project Focus, that's why we're doing well. Mean, ultimately, the strength of our real estate, has been way misunderstood and is why we're doing well in addition to the fact that we have a great group of people with great relationships that are intensely pursuing collection quite candidly.
Thank you, John.
Thank you.
Our next question comes from Christy McElroy with Citi. Your line is now open.
Hey, guys. I'll echo Alex's comment. Thanks for the status breakout of the Q2 build rents and collections in the presentation. It was helpful. I'm wondering if you could provide that same info for July.
I think, John, you said in your comments that on top of the 87% that you deferred another 2%, is that right? And then so obviously collections have improved, but can you provide some more color on sort of the status of the unresolved buckets in terms of what's still in pursuit versus what's really unlikely to be collected and color on your strategy for dealing with that unresolved bucket as it stands today?
Sure. I think we can all chip in on that. I think as it relates to the strategy around it, the strategy is exactly the same, Christy, as it's been since really early March when we started to focus in heavily on this and created our SWAT team that meets every day. So it's a bottoms up strategy, really, and it continues to be a bucketed strategy where we have different approaches with the small mom and pop tenants and the versus the large nationals. And also as it relates to that, we've done great in terms of the great majority of the large nationals have been very good to work with and we haven't really gotten ourselves into very difficult situations there except maybe a couple of cases.
As it relates to we can't get that granular on July yet to kind of per category. But suffice to say, we think we're tracking to do better than we did in the quarter. And I don't know Heath, if you want to give detail around those other buckets or not, but I think it's a little early to give too much detail there, Christy, just because we're still it's we're still actively working on that.
We're still making progress in terms of negotiations with a variety of tenants. I will say the encouraging fact is that right now between tenants that are complying with their lease and ones that we have affirmed deferral deals with, it's over 90 percent. So we're really chipping away at these last sort of holdouts that are not coming to the table yet with a reasonable landlord and tenant friendly scenario. So again, it's like John said, it's dynamic. We're going to keep pushing at it.
And our July number, I'm going to guess, is going to keep getting bigger because as we all know, we can keep collecting rents in periods after the month is over, and we'll keep doing it.
Yes. I think we're confident that what's billed and unpaid, Christy, we are still going to pursue and the majority of that will be paid. So I think that's our macro view there.
Okay. Thank you. And then, if you think about your liquidity and your capital position today and the use of that capital, how do you think about taking advantage of any private market dislocation, if there is any, to buy assets, given that you don't really have anything committed in the value creation pipeline, debt maturities look okay. What gets you comfortable putting capital to work in acquisitions potentially?
Yes, I think it's a great question. And it's what we were trying to get to with our comments in that usually in times of great chaos, there's opportunity there. And frankly, this time around versus 2,008, 2,009, I think we're really well positioned to try to take advantage of that. I do think it's a little early still and I know people keep saying that, so when is it not too early, but it's a little early, that just really early in the sense of the opportunities haven't really presented themselves, that would be real estate that we would want to own at a dislocated price. The couple of transactions that we've seen frankly have gone off at very low cap rates.
And I think people have been talking about cap rates. My personal opinion, I believe that cap rates, if anything, come down due to the fact that you've got reduced NOI and more upside. And you've got the 10 year at 50 basis points, who knows, I mean, we're not predicting interest rates, but that's a long way of me saying we're actively like positioning ourselves to be there, but haven't seen it yet, Christy. And who knows what happens with legislation around you've got this new legislation proposed in CMBS land, etcetera. So we're hanging around the rim.
It's a better way for me to say.
Thank you.
Thank you.
Our next question comes from Todd Thomas with KeyBanc. Your line is now open.
Hey, guys. This is Ravi Zaidi on the line for Todd Thomas. Hope you guys are doing well. Just wanted to ask a few questions about the rent collection data. Can you comment on how they trended between national versus local tenants for the Q2?
Sure. So our local tenants, and this is truly the mom and pops, they were 76% collections for the 2nd quarter and 79% collections for July. So actually very, very, very strong for the mom and pops. And then the nationals were probably 3% to 4% higher for each of those periods, So call them 82% and then 84% for the management.
Great. And just about the restaurants. I noticed that the rent collections for the quick service and the full sit downs are very similar. And we've seen a larger delta between these two types across the subsector. You offer any additional color?
I think the reason why you're seeing those these sort of similar is in the full service restaurants, we don't have a lot of, call it, white tablecloth fine dining, which I think has been the hardest hit. So we've seen our full service folks really being creative in terms of takeout, having curbside pickup, etcetera. So the folks that we do have, it's not that the very, very high fine dining, we're seeing their numbers really decline. So I think that's the reason why those numbers are fairly similar.
Okay. And just one more on the soft goods collection. I noticed that they're 99% open in August 2Q collections are a little or a significantly less than that. Can you offer any color for that? Is that why is that because they opened up later within the quarter?
I mean, each tenant has its own individual set of circumstance. I wouldn't paint a brush there. The reality is, we're in the very beginning of the pandemic. Those guys were kind of disproportionately impacted as we've begun to open up everybody, they're doing better. So we don't foresee that not catching up over time generally with our overall collections.
So you expect that to grow in July in the future?
Yes, we expect it
to grow. I mean, I don't
know exactly when, but we expect it to grow. And the point I was making earlier is, if we've already addressed 90% of our rent, right, in July, we're doing pretty damn well. So we're going to improve things on the margins and that would be something that would be on the margins to improve.
Okay, great. Thanks for answering my questions.
Thank you.
Our next question comes from Craig Schmidt with Bank of America. Your line is now open.
Thank you.
I was wondering what your expectation is for occupancy by year end versus the end of 2Q 'twenty and that would be for small shops as well as total?
Well, I mean at this point, Craig, we're not going to give a number on a projection like that, but because we just don't know. So I think, look, we're trying to make a point that our real estate is a lot better than I think some people have perceived it. So, we'll see what that means as it relates to occupancy. The one thing that we'll never do is we will never try to preserve occupancy in a panicky way. In other words, we won't do deals that are deals that we think are destructive to long term value, which is why if you look at the quarter, it's why we're pretty proud of the way we performed in our leasing spreads and our leasing volume.
And that's why I pointed out the non option renewals because what that the reason that's important is these tenants didn't have an option. So it was a free negotiation, in other words, and we got a 12% spread. So I think we're more focused as a team on that than we are whether our occupancy is up or down 100 or 200 basis points.
Okay. And then just wondering about the consumer traffic at your Las Vegas properties. How are they doing?
I mean, we've done well in Las Vegas. They obviously took a real early hit. They're doing the best they can, I think, in the market to try to bring people back? But bottom line is, it's performed in line with the balance of our properties throughout the country. And again, I think people kind of think about this in the wrong way as they're thinking about the market when you really need to be thinking about the individual real estate within the market and the tenants that occupy those spaces.
So when you look at our community shopping centers that are great majority of which have grocery component, The average size of our center is 140,000 square feet in this BOPUS world that we talked about. We own the right real estate and that's what I want the message to be is we own the right real estate, we're outperforming right now, but who knows where this all goes. But the things that we did last year set us up and we love the market Vegas long run is a great market. But most important for people, I think, to think about is actually the individual micro looking at the micro situations to the macro like that.
Okay, thank you. Thanks.
Our next question comes from Floris Van Deekam with Compass Point. Your line is now open.
Thanks. Morning guys or afternoon I guess depending on where you are. Can you maybe comment on August trends and how much more of an improvement can you get from here?
Floris, in terms of August, I mean, we can't give a lot of detail. Obviously, it's the 1st week. But so far, we're on track as to where we've been. So we have a look, let's put it this way. We set goals on every one of these months and these goals continue to push up and that's our goal is to continue to push up.
So I think trend wise, as long as we continue in this path that we're on in the multiple markets that we are in as it relates to being open and tenants being open for business, that's the most important thing. Everything else is kind of a sideshow. So we feel good about that, but it's kind of too early to say greater detail.
Thanks, Sean. And maybe some of your peers have been talking about the benefits of being well capitalized during this pandemic and that they're starting to see that play a bigger part with their discussions with tenants as well. Maybe if you can comment on the position of Kite in your markets right now and relative to some of the your competitors, if you will? And also maybe touch upon the perception of kites in the overall REIT market as well as you see that changing going forward?
So kind of three things there. I'll talk a little bit about the importance of the company, the strength of the company and maybe have Tom talk a little bit about how that parlays into our individual discussions with the retailers. But in terms of the overall, I think for sure the fact that the retailer knows they're dealing with a strong company, a company that is going to survive and thrive. It is a factor in how they make decisions relative to the real estate itself. But as I said in the beginning, the real estate itself is a very important element, but you do need that second piece of it, which is to say, here's a REIT that has whatever approximately $600,000,000 of liquidity and has plenty of capacity to help us and has capacity to be there to invest with us in the future.
So Tom, you want
to talk about the retailers themselves? Yes. From a retailer perspective on an individual basis, one of the things we've really tried to do is we've tried to take a long perspective. It's in a sprint, It's a marathon. So we're really dealing with our customers on a long perspective, a long view, knowing what's best for the real estate from a long term perspective.
So we believe we've actually enhanced relationships through this time period of working with them, the communication channels have been even higher. So we like to believe that we are putting ourselves in actually better positions with each and every one of these tenants as we move forward. But there's no doubt relationships and trust will play a huge part in this moving forward.
And then kind of relative to your question about our position versus the peers, look, I think all I can say there is the message we're trying to get out there is that our real estate is quite what's the word is performing really well. We don't think the public markets have quite appreciated the strength of our real estate, all the things we did last year that significantly improved the portfolio. As it relates to the peer group, I think, look, there's lots of great companies that have a lot of great things going on. But the reality is when we look at the stock price and the discounts and I think the Page 12 of the presentation that kind of ran you through how draconian the valuation is relative to what we're experiencing in our collections and the strength of our real estate, that's the point we're trying to make. Even if you look at us versus say like the net lease group who we're collecting rent basically at the same velocity that Net Lease Group does and they trade at 6, 7 times multiple to us.
So long story short, all we're going to keep doing, Florist, is grinding and getting this done and improving and pushing and working with our partners, the retailers. So we feel really good about that. We cannot control these other things and we certainly can't control the evolution of the pandemic. But everything we're seeing as it relates to that, we feel better about. And we feel very strongly in this company, and we just want the investment community to kind of start looking at that and realizing, I missed this.
There's a great opportunity here in KRG.
Thanks, John. I appreciate that.
Thank you, Florence.
Our next question comes from Chris Lucas with Capital One Securities. Your line is now open.
Hey, good afternoon, everybody. John, just kind of following up on that. I appreciate the comments and certainly trying to figure out sort of what maybe leads to your relative outperformance on rent collection isn't sort of identifying anything that's obvious as it relates to sort of say tenant line of business exposure or anything along those lines. But I am wondering whether or not you feel like the fact that your portfolio is relatively modest in size compared to some of your public peers, that the conversations that the tenants that you're trying to collect rent from are being had at the C level rather than at some more regional level. Do you think that has an impact in terms of your ability to collect?
I mean, I totally get the question. I think size, it's an interesting thought because you could look at it 2 ways. 1, our size, which we believe is kind of big enough to be important to the right retailers, maybe not so huge that we aren't personally involved in everything as it relates to Tom and myself and Greg Powitz, our Head of Leasing and Keith and lots of people. I mean, we have a group of people that get together every day and talk about how we're going to push the needle up, right, and keep pushing. So I don't think that it really is that in the end though.
I think it's the real estate and the people that the relationships that we have over the last 30 plus years, Chris, that whether or not you own 500 centers or 100 centers, I don't know that, that really matters. What matters is where they're located. And as Tom said, how are we going about it? And are we actively going after this in a way that we're right in front of these people all the time? Certainly, the C suite of these retailers has got a lot to deal with, and we're empathetic to that.
But by the same token, so do we. And I think that's where you get to the that's how you get to this compromise, and I think that's why we've done what we've done. Okay.
Thanks for that. And then a detailed question, Heath, on the I guess, can you give us a sense as to the exposure of ABR exposure of tenants that have filed bankruptcy in 2Q that you guys have?
Yes, sure. So for the tenants that filed bankruptcy in Q2, our total ABR exposure is 2.5%.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Kite for closing remarks.
Okay. Well, thanks, everyone, joining us today. We appreciate it, and we hope everyone stays safe and healthy, and we will talk to you soon.
Goodbye. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.