Good afternoon, everyone. Welcome to Citi 2025 Global Property CEO Conference. I'm Craig Malman with Citi Research, and we're pleased to have with us Kite Realty Group and CEO John Kite. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to live.qa.com and enter code GPC25 to submit questions. John, I'm going to turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons that investors should buy your stock today, and then we can get into Q&A.
Great. Well, thank you, Craig, and thanks for having us, and thanks for everyone for being here today. Yes, this is Kite Realty Group. We're an open-air shopping center company. We own about 180 operating retail properties throughout the country, predominantly in the Sun Belt. About 60% of those properties, 60%, 61%, are community and neighborhood shopping centers. We have recently, over the last couple of years, really changed the company vis-à-vis the merger with RPAI. If there's any questions about that, we can talk about that. And you said, do you want to get into those top three? Is that what you want to do?
Yeah, kick it off.
Right away. I think one of the things about our company that maybe is a little misunderstood is the strength of the operating platform. If you look at our metrics, you look at our NOI margin, our retail recovery ratios, our G&A to revenue, things that we control, I think we're some of the best operators in the business, so I think that's an important thing going forward. We have an incredibly strong balance sheet, one of the lowest leverage profiles in the space, currently at 4.7x net debt to EBITDA, so that affords us a lot of optionality as well, and then, you know, I think just as I said a second ago, just the massive change and improvement in the business over the last five years, all those things encompassed, as well as a compelling entry point into the stock at the current time.
That would be the top three or four.
Perfect. I guess we'll start with a question you haven't heard today. Could you give us an update on the bankruptcy kind of guidance that you gave with earnings? I think, Heath, you had said about six of the 25 spaces were assumed to be backfilled.
Five of the 29. Close to five of the 29.
Five of the 29. Can you give an update after some of the auctions have kind of taken effect and maybe you had a couple of weeks here? Have you any update to that five if it's looking better than that potentially?
I think we're going to keep the cap at five for 2029 right now. So if you kind of look at what's happening with each, I would describe them. For Party City, two of them were assumed. Six of them were where Party bought lease designation rights, which basically means over the course of the next several weeks, we're going to be negotiating with this party around things like term, option, rent, et cetera. So there's a version where we'll get a handful of these deals as well. Although you want to balance that against this idea that is there a better user for the box, right? So that'll be a live ongoing negotiation. Then for JOANN, we have five of those. I know that the bidding should begin here this week, next week. We'll have a better view on what's happening with JOANN.
I do know that there are two large parties that are looking to purchase significant packages of it, so I'm expecting we'll have some activity on JOANN as well. So again, I think the five out of 29 number still feels pretty good. Again, this is only two weeks ago, and nothing's really changed in between to have us have a more optimistic or pessimistic view of that number.
From a demand perspective, kind of what's the pipeline look like on the spaces? I assume everyone knows which spaces you own and probably have talked to you about them. Just kind of curious what that looks like. And then, John, I know even through Bed Bath & Beyond, right, it wasn't about speed of backfill, it was about quality of backfill. And so your kind of thoughts there on how that could play out as well?
I'll start with the second half of the question. I mean, I think that continues that what you have to keep in mind, although it feels like in the last couple of years, these seem to have come as opposed to individual retailers going out one a year or whatever. It's been concentrated, especially this last quarter. But you don't always get these opportunities to get these spaces back. Frankly, the majority of these leases are long with probably four or five years' worth of option periods. So that's another 20 years of lease term. So we want to be very thoughtful around what the backfill is, which is why we have said in the past that this is about value creation, not about how quickly we can backfill a space. So I think our thought process is the same. Obviously, this is a significant impact.
It's around 200 basis points of occupancy. So it's significant. That being said, these are tenants that we've wanted to replace for years. So we wish we could have done it in a more orderly way, but they hung onto their spaces and they liquidated. So I think that part has not changed. Our philosophy is we're going to take our time to add the right merchandising mix to the center versus the quick fill. Do you want to hit the first part of that question or?
What was the first part again?
Oh, just what the demand pool looks like.
I mean, listen, the demand, it's deep and diverse. We had an incredibly long real estate committee today. We had an incredibly long real estate committee last week. So whether it's specialty grocers, discounters, sporting goods, so the demand is still there. So we're super excited about the folks that we're putting in. And to go back to what John said, when something like this happens and you get 29 boxes back and you're staring at this tremendous NOI disruption over the course of a year or a year and a half while you're filling it back up, there is a temptation to go fast. And we could put in six trampoline parks tomorrow, but that's not going to drive value. There's a version where I need to wait an extra six months, an extra 12 months to put a grocery in there.
Now, not only am I putting a grocery, earning a good spread, I'm driving traffic, but potentially also compressing the NOI and the balance of the center. We're going to take time. So John said, way back when we got all the Bed Bath & Beyond, he said, this is about taking our time and trying to get the best tenant, not the fastest tenant. And we're going to approach these 29 new boxes the same way. What is the best, most accretive value-enhancing use that we can put there? And to John's point, this is an opportunity. It's not fun getting 29 boxes back. We all know that. But given a choice between getting them back overnight and be able to redo them, I'd rather do that now than have to wait and have to continue to worry about a tenant on the credit watch list.
So after these names vacate, right, and you have a pro forma tenant list, what does the watch list look like beyond these guys?
Certainly smaller. Listen, I think the categories that we look at and keep a close eye on are no different than anyone else. Keep looking at the pet concepts, keep looking at the office concepts, looking at Michaels, and when we look at the watch list, it's generally about these larger format tenants, and it was just consistent with what we said during our earnings call a few weeks ago is that we really are looking over the course of time to cycle out of some of these boxier assets in the middle and to reduce our exposure to these watch list tenants. Because for better or for worse, whether you like them or not, they have options, right, so that you can't force them out of your projects. So again, it's just over time, we really like the grocery end of our business.
We really like the mixed-use part of our business. So I think just over time, you'll see us not only, again, the watch list is smaller than it was, but I think we're also going to be taking steps to hopefully reduce our exposure to watch list by recycling capital.
Any questions in the room? Okay. John, I think one of the three pillars of why to buy the stock today, the last one was valuation, and clearly there's a range of valuations, but I have you guys close to an eight cap on an implied, right, and you have 10% of your NOI coming from Southlake and Loudoun, which are low cap rate assets. I know you guys are focused on execution. What's the path to getting the value recognition in the public markets, or at least the steps that you want to take here in the near term? Because the 4 in 24, I thought, was a great way to get people to see your portfolio and to see the quality of it, and so I'm just kind of curious what the next idea is.
I don't think there's particularly a silver bullet. I think it's first and foremost, we have to execute. We always believe that we have to control the controllables. There are some uncontrollables, but we want to mitigate those. Part of the reason we did that 4 in 24, and it was a significant investment in time and resources, was to make sure that the investment community understood the depth of the portfolio, which is hard to do when you're only visiting four markets. I think people got an understanding of, boy, maybe I had a misconception of what the assets are really like. Also, what the operating platform is like. I think, Craig, I wish we could just talk about it and it would correct itself. In some respects, maybe that will help.
But it's also this idea that we've got to continue to pivot the portfolio to growth. We've got to have the right composition of assets that generate more embedded rent growth. And that's something that we're actively working on. I think we've been a market leader in pressing our tenants into paying us what we deserve. And in our minds, an anchor tenant's paying less than 2% a year in rental increases. We don't think that's right. And so we press hard on that. And perhaps it slows us down a little bit in that occupancy growth, which maybe investors can be concerned about. And I get that. But the reality is we're making the portfolio better. So I think over time, this will be very clear. And I think that the market will recognize that over time.
But we have to keep pursuing the right kind of thought process around where we're allocating capital, how we're spending it, what the returns are that we're getting. And most importantly, the composition of that portfolio that's going to be a better growth vehicle in the future. So I mean, I think I would just surmise that by saying we're going to do everything in our power to create more value.
And as you guys look at sort of the uses of capital, redevelopment continues to be a high return use of capital. You'll unfortunately get a little bit more of that back potentially with some of these boxes. There's also some bigger assets in the market. Are you guys as interested in some of these bigger assets? If you are, do you go the JV route on them, given the cost of capital to bring it down and get some fee stream from the management fees and others to kind of juice your yield a little bit? How do you kind of grow through this pocket of volatility in the stock price, which long-term value is there to do some of these deals? But how do you navigate that with sort of the cost of capital?
Sure. So I'll start with this. So I think during our 4 in 24, and you said it, Craig, 10% of our NOI comes from places like Southlake and Loudoun. So we're talking about these big assets in the mixed-use space. 25% of our NOI growth from last year was from those assets alone, right? So they've been performing extremely well. And would we like to have larger exposure to those assets? Of course we would. But first of all, they rarely, rarely come for sale, right? So when they do come for sale, it's something that you've got to take a look at and say, okay, is this the right time for us to be doing this?
And looking at where we are now, and one of the things that we said during 4 in 24 is if we ever looked at an asset of that size, if we were ever to go out and buy a Southlake or Loudoun, certainly we would buy that with a joint venture partner. That's just too large of a bet for someone to take on a solo basis. And obviously, as you suggested, when you have a joint venture partner, they can certainly do a lot to improve your overall yield on the project. So that was a version of something we were going to do. That's how we would do it. Then in terms of sourcing, how would we source funds for something like that? I mean, I think you'd look at, again, we said this on our call, that our leverage is so low right now.
We're at 4.7x net debt to EBITDA. That, when we do capital allocation, while we're mindful of our weighted average cost of capital and our cost of equity, for us, it's much more of a granular sources and uses exercise. And right now, at 4.7x , which is well below our 5x to 5.5x net debt to EBITDA target, we've got debt capital powder that we could use, which could be priced very attractively. We're seeing spreads now being quoted recently at somewhere between 100 and 110 basis points over. So we could comfortably sort of acquire first, as we mentioned on our call. But as we also mentioned on our call, we are not guiding to being a net acquirer or a net disposer.
We're saying that we're going to responsibly match fund and do it in a way that we believe is going to be accretive or neutral at worst. So that's kind of how we're looking at our capital allocation on a go forward basis.
Yeah. I think the only thing I would add to that, regardless of the size of the transaction, and again, keep in mind that our balance sheet is, I think our undepreciated book assets is close to $8 billion. So we have optionality with that balance sheet and particularly with the low leverage. But it's less about the individual transaction and more about what it adds to the portfolio, what it adds to our ability to get a hold of something that we can add value to. And I think you brought up Southlake and it's a great example. And we've said this publicly. But when we did our deal with our RPAI and got Southlake, the NOI was $20 million-ish. It's over $30 million now. That's three and a half years.
So if we feel like we can add significant value to an asset vis-à-vis the repricing or the better management, better margins, how we actively manage, how we lease, that's important to us. So you have to look at the elements of it versus just the size of it. But again, as he said, even with our size, significant balance sheet, you also have to weigh your risks. So we would weigh that if it was a really large one.
Where would you bring the 4.7 back up to? Would you go up to 5.5 , 5.75x debt to EBITDA and kind of how much dry powder would that give you?
I mean, I'll let Heath say this too, but I mean, we've been clear that we think our target range is between 5x and 5.5x . There's plenty of guys in our space with higher multiples at 6x , 6x, even some higher, but we've been doing this a long time, and we believe after all that experience that if we operate in that 5x to 5.5x , it insulates us when situations occur, and people use the word black swan, but you see a lot of them, so we want to be ready for that next situation, and we're not looking to take it very high, but we're very comfortable in that 5x to 5.5x , and I think we would always have a path back down is the other thing to be aware of.
And in regard to that, we're at 4.7x , but we've had an incredible amount of CapEx in the last three years. And now it's continuing with what we've been doing on the tenant backfill front. And meanwhile, we're still delivering. So I think we spent over $100 million a year over the last two years. Probably going to spend about the same amount in 2026. We thought it'd be less. It's going to be more because of these recent bankruptcies. But the returns on capital have been tremendous. And more importantly, we're backfilling it with tenants that are going to add value to the existing asset. So I think all in all, that's pretty good in the scheme of what we've seen the last couple of years.
And as we think about One Loudoun, you guys are moving forward with more phases there. But I think during the property tour, you had talked about sort of recapping the existing multifamily there with the partner to bring it to a consistent level across all three. And that would clearly give you a little bit more capital, I think, to fund your part. I mean, outside of the CapEx from the redevelopment or backfill, right, how much of the development spend do you think is kind of going to be funded with some of these value extraction sources from farming out the multifamily or bringing in a partner rather than that can help fund your piece?
I think the use is pretty important, Craig. So if it's retail expansion, that'll be something we'll do by ourselves. If it's something that's not retail, whether it's apartments, office, lodging, etc., we'd look for a capital partner. And just like John said, on large assets, you look to diversify. On assets that are not in our wheelhouse, we also will look to diversify. So when we're thinking about Loudoun, progressing nicely on the multifamily transaction, progressing nicely on the lodging transaction. So we'll have some more specifics hopefully here in the next months on what that means.
But stay committed to this idea that when it's not retail, whether it's something as simple as on the lodging front, we'll be contributing the air rights and we'll take back a small piece of that venture partnership in order to sort of control and make sure that they're operating that hotel in a manner that's consistent with Loudoun. Or on the multifamily piece, we'll take somewhere between a 15% and 55% stake in it and with a best-in-class partner. So again, diversifying is, I think, an important part of our capital allocation strategy when it's either really large or not in our wheelhouse.
But you're correct. The significant amount of that capital comes from the rebalancing of the multifamily. And that will be spent on the retail side. That is correct.
We had a question coming in. This brings us back to acquisitions and to really the flavor of, would you do an acquisition that's initially FFO dilutive, but long-term accretive by sense to NAV and earnings?
Yeah. So would we do an acquisition that was short-term FFO dilutive, but long-term accretive? I mean, never say never, but that's not sort of the current plan, right? Again, to the extent that we're looking at acquisitions, that's what we're talking about. Saying very clearly, we look at these things in a very sources to uses manner. We would like it to be FFO accretive from day one. And then obviously IRR accretive on a longer-term basis, right? So yeah, I don't think, again, never say never. There's a once in a lifetime, oh my gosh, and there's some extremely accretive strategic reason to do it. And also we thought we could drive value fairly quickly when we take some short-term pain. Yeah, but that's not something that's currently on our radar.
I mean, I think the reality is sometimes you can't time things perfectly. And so sometimes you get into these positions where there's a period of time where that can occur. But your goal is to overcome that through what else you're, the other parts of your business, you're trying to overcome that. So obviously we're trying to always improve the quality of the assets. So is there a potential that something gets sold and something gets bought and there's some dilution? Of course there is. But our job is to manage that to the point where hopefully it's not impactful.
But it seems like more of that dilution would come from potentially match funding it with dispositions at maybe higher yielding, but you'd want to get something.
Yeah. I know where you're going. I mean, you also have people that underwrite things from an IRR perspective. You have people that underwrite things from a cap rate perspective. There's a lot of different ways to slice it. So I think it depends on the eye of the beholder.
Yep. Anything from the audience? All right. You've noted in the past, or you've shown it, that you guys are aggressive at pushing escalators and you're getting it, right? In an industry that feels like most people don't want to rock the boat more so, has there been any kind of pushback to that momentum given all the uncertainty around tariffs and the consumer maybe being a little bit top-heavy to higher earners and the sustainability of that with credit card debt? Anything kind of on the broader macro side that's changed at all over the last two or three months?
I would say not in a material way at this point. It's kind of early in that whole geopolitical process to see what the impacts will be. I would say the majority of our retailers are focused in on trying to take advantage of opportunities, not passing on opportunities like they did in the past. I mean, I think there's a lot of retailers who wish they could reverse the clock to the COVID days and maybe be more aggressive about taking spaces. I mean, a good example is if you look at all the deals we did in 2024, the anchor deals, remind me the number we did 24, 22. That was 19 different brands that we did deals with across 22 spaces. So the depth is significant.
I think when you have that dynamic, even though this is a broken record that you guys hear this all the time, that the supply is very limited, it truly is very limited. I think that is a good environment for us to be in to press. Maybe we press a little harder than others. I don't know. The reality is you get one shot when you're doing these anchor deals to do a better job than you did the last time you had that shot. One shot in maybe 10 years is what I mean by that.
Are there any tenants that you're pulling back from intentionally that a lot of people still view as a good tenant, but maybe you feel like you're just a little top-heavy on them or you're a little top-heavy on that segment of the market?
Well, since people are listening to this, I'm not going to give you the answer to that in a specific way. But I would tell you that obviously there are tenants that are on our list of concerns that we would actively look to manage that relationship. And there are examples of national tenants that have wanted to renew with us or wanted to do new deals and we didn't. That doesn't make for a pleasant conversation, but it's part of our business and we have to manage it. So yes, the answer to that is yes, that we're trying to improve that composition and improve our risk-weighted exposure. But that doesn't happen overnight either. It takes time. And each property is its own independent little universe. So it's kind of on a property-by-property level as well.
We actually just had two questions come in that kind of dovetail each other. Let me figure out how to combine them. But really the gist is, is there a way to be more aggressive with proving out value through dispositions? And if you did that, some peers are talking about selling lower cap rate assets or even land holdings or ground leases, right, to monetize some of this opportunity. If you were to do that, right, how would you look at the different options of just doing a special dividend versus buybacks versus if you had the lower cap rate proceeds from land sales to do more acquisitions?
Let me start with the first part and then Heath can talk about the distribution of that capital. I think the first part is it's important to note that I think in our view, trying to pick a point in time to kind of spot market, spot cap rate your portfolio vis-à-vis sales generally doesn't work. You need to be doing it for the rationale is you have a real kind of business methodology that you're following as opposed to, hey, I want to sell something and show that it's sold at a five cap or six cap or whatever. That being said, there are components of our portfolio that aren't growing at the rate that we want them to grow at. We will look at that.
And we will look at disposing of those assets, even if they would be viewed as very high quality, if we don't think they're strategic in whatever way, which would include ground leases. And we've done that in the past. So the answer is kind of yes, but not for that reason. Not to kind of try to make a mark, really just if it feeds into our idea that we want better embedded growth in the overall portfolio. And then you want to cover like the distribution.
Yeah, I mean, I think obviously when you have proceeds from a disposition, whether it's from ground leases or something else, you pull out your capital allocation menu and what can I do with this? I can pay down debt. I can buy back stock. I can send a special dividend out to my shareholders or acquiring an asset. And when we're looking at the relative returns, or I can spend the money on leasing, which again, most of our capital over the past three years has been towards leasing. And based on this new slew of bankruptcies for the next several years, we're going to have elevated leasing spend. That's definitely the best source of our capital. But there's still free cash flow beyond that.
When we're evaluating the other choices, we're looking not only at the financial return, which is obviously a huge piece of it, but also the strategic return, and what is being accomplished by deploying the capital in this particular way? I would tell you when I'm thinking about stock buybacks, it's a little more pressure on the strategic return, right? I can definitely triangulate the financial return for you, but the strategic returns are a little harder, right, so you try to balance this thing, and you make the best decision you can make at that point in time. We have some available capital. What are we going to do, and that's how we approach it, and by the way, what is our source and what is our use, and let's make sure that's accretive. Let's make sure there's a positive arbitrage between what we're doing there.
The only other thing to add is sometimes it's outside of your control. I mean, you may have to pay a special dividend depending on the tax circumstances, right? So I think what Heath's trying to say is there's a lot going on in that formula. And we do the best we can within reason, within the realms of the REIT rules.
And we've in the past gone through sort of the enhanced cash flow once some of the CapEx spend, which you guys had thought was going to end a little bit sooner. Now it looks like it's going to be a little bit elongated. But by pulling forward those mark- to- markets, I mean, in the medium term, how much cash could you guys be throwing off once this NOI pipeline kind of normalizes, CapEx moderates? What kind of annual cash flow could the portfolio be?
Yeah, I think we've said in the past that once this elevated leasing spend is over, it's well in excess of $100 million. And to your point, based on this recent rash of bankruptcies, that inflection point's probably delayed by 18 months as compared to what it was before. But the great thing about our balance sheet is that even despite this elevated leasing spend, $100 million a year call it, which is about $50 million on a range in excess of what would normally be spent, our leverage is at 4.7. And we went from sometimes I feel like our leverage journey is underappreciated. We went from one of the highest leverages in the space to the lowest leverages in the space. And by the way, it wasn't without some cost to that, right?
I mean, we don't have a massive development pipeline because we decided to get lower leverage, right? We didn't go on an acquisition binge and keep our leverage at 6.5x because it was important for us to get down to a really low leverage. It is not a coincidence that we're sitting at 4.7, which I think we all can agree and look around that we're probably in a pretty volatile environment and there's a lot more that we don't know than we do know. Just like it wasn't a coincidence in 2019 when we sold $1.5 billion of assets to get our balance sheet to a place. Couldn't have predicted a pandemic, but we knew with a presidential election coming that it could be possibly volatile. So we're trying to be mindful.
Again, that journey has been something pretty significant. A big portion of our call last time was at 4.7x; it's not a mandate, it's just the flexibility to do stuff, which has been so great. Whatever's happening over this next six months or 12 months, for us, it's not just about surviving, it's thriving and it's being able to deploy it in the event there's opportunity.
Any questions from the audience? On the leverage though, from I mean, I guess if you get up to 5.5x , I mean, is there long-term benefits, right? When you look at where some of your peers are trading, FFO growth could be a little bit better because they're a little bit higher leverage, right? From a pricing perspective to be 4.7x or 5.5x , your pricing grid on debt, I mean, is there that big of a difference?
I don't think you get rewarded under 5x, right? I mean, I think at some point if you're at 5.5x , you feel very good that you're going to be able to not only, again, not only survive through some sort of disruption, but be able to come out on the other side and perhaps be acquisitive or if there's an opportunity, right? So yeah, we are a coiled spring at this point right now at 4.7x. But in terms of the FFO growth and we've talked a little bit about it. When you think about and part of the question of what's going to hopefully turn the stock price around is that, listen, we had some of the highest exposure to Bed Bath. We had some of the highest exposure to this recent crop of bankruptcies.
All of us in this space are riding this crest of occupancy. And that occupancy crest is going to peak at different times for different companies. And for us, this last rash of bankruptcies happened to push that growth back. Couple that with some non-cash noise that we had from our merger. And it has muted our growth. I think in terms of the catalyst for us is when it's our time to crest and when some of these non-cash things have burned off is when I think that's when things will turn around.
Yeah, I mean, I think if you look one way to look at that is look at the trajectory of where the same-store NOI in Hawaii was in 2024, right? I think in the second quarter it was below 2%. By the fourth quarter, it was close to 5%. And then we get hit with that, right, so the new leases can produce strong growth, but we want to kind of buffer that exposure to what could create volatility in that growth.
Makes sense. Any questions from the audience? Last chance. All right, I'm going to go to rapid fires then. For 2026, strip, same-store NOI growth, where do you think it'll be?
Probably 3.5 -ish.
And then a year from now, will there be more, less, or the same amount of strips?
Hopefully less.
Perfect. Thank you guys so much. Have a great conference, everyone.