Thank you for standing by, and welcome to Kite Realty Group Trust Fourth Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to hand the conference over to host, Senior Vice President Corporate Marketing and Communication, Bryan McCarthy. Please go ahead.

Thank you, and good morning, 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 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 the reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; Executive Vice President and Chief Financial Officer, Heath 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, Bryan. And thank you everyone for joining us today. While we've certainly been looking forward to this call for quite some time, today is our first opportunity to truly quantify and articulate the benefits of our highly accretive merger. We closed on the transaction in late October, and since then have been working tirelessly to complete the integration and implement KRG’s culture and operating philosophy across the combined organization. The timing of the merger was impeccable and KRG was positioned perfectly to take advantage of the opportunity. It's now become clear that the merger is even better than we anticipated. Today, I'm going to speak about three horizons of opportunity for KRG: those opportunities that are immediately in front of us, those that will cultivate over the next 19 to 24 months, and those that will materialize over the long term. The most immediate benefit of the merger, of course, is the significant earnings accretion. As set forth in our press release, we are providing 2022 full year FFO as adjusted guidance of $1.69 to $1.75. Heath will give additional color as to the underlying assumptions. As mentioned in our press release, the midpoint of our guidance represents a 33% increase over KRG’s full year 2020 FFO per share. While we've only owned the legacy RPAI assets since October 22nd, we quickly jumped headfirst into attacking operational efficiencies with an intense focus, as always, on our leasing efforts. Against the backdrop of strong demand from a deep and diverse set of retailers, KRG is experiencing significant leasing momentum across all of our open air product types. In fact, we're noticing that national retailers are now looking more intently for space across the open air spectrum, which dovetails nicely with our high quality and well located properties. These positive trends are readily evidenced in our fourth quarter and full-year leasing results. During the fourth quarter, KRG leased over 900,000 square feet at a very strong 12.9% blended cash spread on comparable new and renewal leases. The blended spread on our fourth quarter comparable non-option renewals was 10.2%. This is a strong indicator of where market rents are headed for the KRG portfolio. For the full year, KRG leased over 2.6 million square feet at blended cash spreads on a comparable deal of 10.7%. As a reminder, those leasing statistics, including the leasing activity from the legacy RPAI portfolio, are since October 22nd. If we include the activity from the legacy RPAI assets for all of 2021, we leased over 5.1 million square feet for the combined portfolio. Based on this progress, our retail lease percentage stands at 93.4%, up 220 basis points over last year, and yet we still have significant upside. The portfolio has signed-not-open NOI of approximately $33 million, which will primarily come online during the back half of 2022 and the first half of 2023. This bodes extremely well for our growth trajectory going into 2023 as the rents from all these leases will be fully annualized. The good news is that the $33 million of signed-not-open NOI represents about half of the near term leasing related NOI opportunity. As detailed in our investor presentation, leasing our active developments and the balance of the portfolio to pre-pandemic levels, which is very achievable in the current environment, would equate to an additional $34 million of NOI coming online over the next few years, over and above the $33 million of signed-not-open NOI. Our increased scale and improved balance sheet represent a host of immediate opportunities, including the potential for lower debt costs, increased liquidity in our stock, and enhanced relevance with our tenants and vendors. We are marching toward completing the active development projects detailed in our supplemental. It's important to note that we reevaluate every in-process legacy RPAI project solely on a forward-looking basis. Based on KRG’s underwritten incremental NOI related to the active developments, we are anticipating very solid returns. We're meticulously reviewing the land bank, also disclosed in our investor deck, in addition to a multitude of other opportunities embedded within the KRG portfolio. We have learned over the years that each project is unique and requires a customized approach in order to achieve the best risk-adjusted returns. Sometimes that means bringing in an experienced joint venture partner or monetizing the land. For example, during the quarter, we entered into an agreement with Republic Airways to develop a new $200 million corporate campus on an outdated retail location owned by KRG in Carmel, Indiana. We knew the highest and best use of the land was no longer retail. Therefore, we sold a portion of the land to Republic for approximately $7 million and will serve as the master developer of their campus. KRG will not only receive a sizable development fee, but also a profit component, all while putting zero KRG capital at risk. The cash from this development will be recycled into an income-producing investment. This is one of several examples detailed in our investor presentation where KRG creatively generated high risk-adjusted returns for our shareholders. I'm very optimistic about the long-term outlook. That should come as no surprise, and in the near term, we will be spending a significant amount of capital on leasing. Looking beyond the next few years, we begin to generate substantial additional free cash flow, while also naturally deleveraging. We’re setting up to be in a very liquid and favorable position with a net debt to EBITDA in the low to mid-5 times. While I can't predict the macro environment, I'm confident we will be ready to respond aggressively regardless. Before I turn the call to Heath, it's important that I note all the great opportunities that I just outlined are ancillary benefits of the merger. We did this deal because we love the real estate and saw a significant upside potential. Having been in this business for over 30 years and having visited nearly every legacy RPAI asset, I can unequivocally tell you that the quality of our portfolio is improved by virtue of the merger. When I see what's happened in the private market valuations over the past six months, I couldn't be happier with respect to the timing of our transaction. We doubled down on the amount of GLA that we have in our warmer and cheaper markets. These markets continue to benefit from household and employer migration, which is a trend we don't see changing anytime soon. We have a sector leading presence with over 60% ABR in these markets, 40% alone being in Texas and Florida. The merger also provided KRG with a new or enhanced scale in key gateway markets such as Washington D.C., New York, and Seattle. These world-class cultural, educational, health, and lifestyle hubs have endured the test of time and are home to many of the opportunities that we discussed. In summary, there's nothing better than owning high quality assets in high quality places. As the world opens back up, I encourage each one of you to join us on our property tour and see the quality firsthand. And as always, I want to thank the entire KRG team for their hard work and dedication. KRG is nothing without our tremendous people. I can't emphasize enough how excited I am about what we've accomplished as a team, but more importantly, what we'll accomplish together in the future. I'll now turn the call to Heath to provide more color on the quarterly results.

Thanks, John, and good morning, everyone. I want to echo John's excitement and confidence in the path that lies ahead. The opportunity in front of us is absolutely energizing. On the integration front, our substantial efforts to date have enabled the combined organization to operate at a high level and truly embrace our internal model of one team one focus. Before I discuss KRG’s fourth quarter results, please keep in mind that they are a bit clunky by virtue of the fact that we closed the merger on October 22nd. All the results are from the combined portfolios; we only have two months and nine days of contributions from the legacy RPAI assets. For the fourth quarter, KRG generated $0.43 per share FFO per share as compared to NAREIT; our as adjusted FFO results add back in the $76 million of merger related costs and deduct the $400,000 of net prior period activity. For the full year, KRG generated $1.50 of FFO per share as compared to NAREIT; our as adjusted FFO adds back in the $87 million of merger related costs and deduct the $3.7 million of prior period activities. Our same property growth for the fourth quarter and full year is 7.2% and 6.1%, respectively. These results are primarily driven by a reduction in bad debt as compared to the prior year periods. Absent the net contribution from prior period activities, the fourth quarter and the full-year same property NOI growth is 6.8% and 4.3%, respectively. These metrics and a host of others are set forth on the new summary page in our revised supplemental. We hope you like the changes. Our balance sheet and liquidity profile not only remains solid but continued to improve. Our net debt to EBITDA was six times, down from 6.1 times last quarter. Adding in $33 million of signed but not open NOI from the combined portfolio, our net debt to EBITDA would be 5.6 times. We are in a great position to not only weather any storm but to also take advantage of any opportunities that present themselves. As John alluded to earlier, we are providing FFO as adjusted guidance of $1.69 to $1.75 per share. The variance from NAREIT FFO is approximately $0.02, which represents our estimate of $4 of non-recurring merger related costs. Furthermore, the accounting adjustments related to the legacy RPAI below market leases and above market debt contribute an incremental $0.06 of FFO per share to our 2022 guidance. This is a good indicator of our future ability to drive rents and reduce borrowing costs. Additional assumptions at the midpoint include neutral impact from any transactional activity and bad debt of 1.5% of total revenues. As you all know, providing same property NOI growth is a skewed proposition for the sector, given all the noise over the past few years. It is especially tricky right after a merger of two companies that approach the potential pandemic credit loss from different perspectives. In order to avoid any confusion, we are assuming same property NOI growth of 2% at the midpoint, excluding the net impact of prior period adjustments. This estimated 2% same property growth is primarily driven by occupancy gains and contractual rent bumps. Last week, KRG declared a dividend of $0.20 per share for the first quarter; this represents a 5% sequential increase and an 18% year-over-year increase. The dividend will be paid on or about April 15 to shareholders of record as of April 8. One last thought before turning the call over for Q&A. In our press release, we touted the anticipated 33% growth of our 2022 FFO per share as compared to our 2020 FFO per share. I think another compelling comparison is to look at our original 2020 FFO guidance of $1.50 per share at the midpoint. Like our peers, we gave this guidance before the pandemic set in and reflected KRG’s run rate after selling over $0.5 billion of assets in connection with project focus. Our 2022 per share guidance represents a 15% increase over our original 2020 per share guidance at the midpoint. During the course of 2021, many of you asked when will your earnings return to pre-pandemic levels? On a per share basis, not only have we returned to pre-pandemic levels, but we tapped on another 15%. Just another testament to the compelling accretion and synergies associated with our well-timed merger. 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 Floris Van Dijkum of Compass Point. Your line is open.

Thanks guys for taking my question. Heath, I just wanted to delve into this $0.06 below market lease adjustments a bit more. How should the market think about that? Is that just a one-off event? Does that just mean that you guys bought these things, the RPAI assets cheaply? Or how should investors think about that adjustment in your view?

I believe it’s important to focus on the potential benefits here. We are seeing a positive response based on below market rents from our leases and favorable conditions for our above market debt. This indicates embedded growth, as an independent third party has assessed our leases and suggested we can secure funding at rates better than the debt we currently hold. So while it’s $0.06, I feel that these are two very encouraging factors that highlight one of the advantages of the merger. We have an excellent portfolio with significant potential.

Great. I’d like to follow up and get your thoughts on this as well, John. We initially estimated the yield at the time of the transaction to be 6.8%. Since then, your stock prices have dropped slightly, and close to the completion, it likely rose almost 100 basis points to 7.8%. Cap rates have evidently decreased in the market. What do you think this portfolio would be valued at in today’s market considering the rumor about the portfolio transaction and other factors? Additionally, could you provide some insights on your own implied cap rates? It seems they might increase due to this transaction, and the adjustment of your leases to market should result in an increase in your NOI, although your AFFOs might be slightly lower. This evidently affects your share pricing and overall value. John, could you also discuss the changes in cap rates, particularly in relation to KRG?

Hi, Floris. I'm going to address your question. It's quite a substantial topic you've brought up, but ultimately, it's wonderful to be on the call and finally showcase just how significant this transaction really is. We've been engaged in this for quite some time, and it's among the best transactions I’ve ever witnessed. Regarding your question about cap rates and their compression since we started working on this deal, it’s important to note that we initiated discussions nearly a year ago, and cap rates have compressed by 100 to 200 basis points since then. If we were negotiating this deal today, the situation would be vastly different, with considerably lower cap rates, no doubt about that. You've been keeping up with many of these transactions, and the market is experiencing a significant influx of capital pressing into retail, making it challenging to secure deals with cap rates above 5. Even considering a 5 cap rate, which was previously acceptable, is now difficult. We fulfilled our commitment when we highlighted our impeccable timing, which was intentional. Going back to the start of COVID, I recall mentioning in the first-quarter call that we would emerge from it stronger, and we did. We capitalized on an incredible opportunity to combine two strong companies into one leading firm in the top five of the industry. Addressing your question about our NAV, we've provided the necessary components for your evaluation, and while we don't casually present NAV figures, the latest consensus NAV from 12 or 13 analysts who cover us is just below $25. I believe it is likely to increase from there. The last time I checked, you were around 27%. Thus, most savvy analysts would place our company's value between $25 and $29, which reflects external assessments rather than my opinion. However, we are committed to demonstrating our performance, and that's what we will do. It's an exceptional deal.

Thanks, John. I would like to discuss the guidance for 2022 that you provided. It seems to be based on relatively modest NOI growth. Are you perhaps taking a cue from David Simon and presenting figures that you believe you can exceed later this year?

I try not to take from David, and I usually don’t. However, I believe our guidance is conservative, which is appropriate for the start of the year. While we feel confident about our outlook, we still have to consider COVID's ongoing presence. Using the 1.5% bad debt figure is a smart approach at the beginning of the year. In the past, before COVID, that number typically ranged from 75 basis points to 1%. We think this estimate is conservative yet reasonable, especially given the uncertainty that can arise at the start of a year. When I review the guidance we presented during the call and the operational strategies we have as a large organization, I would be disappointed if we didn’t reach the top end or exceed that.

Hi Floris, I'll just add that regarding the 2% NOI growth being muted, there are two key points. First, our signed but not open NOI will be reflected, as John mentioned, in the latter half of the year. Additionally, when considering our same-store guidance, remember to take into account the bad debt assumption, which is 1.5% in a normal year. Before COVID, we were operating between 15 to 100 bps. We included what we believe to be an appropriate estimate. COVID is still a factor, so we view this as conservative guidance and we aim to exceed it.

Thanks guys.

Thank you.

Thank you. Our next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is open.

Hi, thanks. John, you mentioned in your prepared remarks that the RPAI merger is performing better than anticipated. Can you elaborate on what specific aspects have exceeded expectations? How is the RPAI portfolio performing compared to the plan? Additionally, could you provide some context regarding occupancy gains, leasing activity, or any additional benefits mentioned regarding discussions with retailers and vendors?

I think it's all of those factors, Todd. First, our NOIs are higher than we anticipated, which is a positive sign. Revenue is up, and expenses are in line with our expectations, leading to a better NOI situation. We've been fairly conservative, as we have mentioned before. Looking at the fourth quarter, our leasing spreads are exceptional, reaching sector-leading levels of around 13%. This figure reflects the performance of the combined company since October 22nd. There may have been some concerns regarding this area, but we have demonstrated that those concerns were unfounded. The quality of our assets has been discussed previously, and when you compare the metrics of the combined company to the top five peers, it highlights why we should be valued significantly higher than our current price. The data shows that, considering demographics, SuperZip areas, and our ABR, the quality is evident. Regarding leasing activity, if you consider the combined performance of both companies for the years, we've achieved a remarkable total of over 2.5 million square feet. Overall, everything we are assessing is better than we originally projected.

Yeah. The only one I would add, Todd, is the active development pipeline. I think when we got into this, we obviously didn't understand what all was contained and how it would be dealt with. But this active development pipeline is very manageable. When you go through each one of these properties and you look at $105 million that is yet to be spent, we have our arms around it already. We understand the execution. So we feel comfortable there and look forward to the upside of that component as well.

Kite, you previously emphasized increasing exposure to leases with Fixed CAM to enhance your NOI margins. This quarter, the expense recovery ratios were affected by the integration of the RPAI portfolio. Are there plans to implement Fixed CAM across the RPAI portfolio? Do you see opportunities to improve the current NOI margin of approximately 72% and return to a higher level? What potential upside do you foresee over time, and what is the expected timeframe for achieving that?

First of all, there is no RPAI portfolio; it's just one portfolio that we've discussed. One team, one focus, which is very important to us. Bringing in the new properties means that none of them were on Fixed CAM, so this combination will reduce our exposure to Fixed CAM. It takes time. It likely took five years for the Fixed CAM initiative to exceed 50% of our portfolio and start delivering real benefits, and we will follow the same approach here. In every real estate committee meeting we have, we are actively working on this. There were some deals that were in progress before closing that did not have Fixed CAM, but aside from that, lacking Fixed CAM would be unusual. When looking at our margins and recovery ratios, we are significantly above our peers. Even in the combined figures, we remain at the top end of our peer group, and we will continue to pursue improvements. It's a gradual process, but we are optimistic about enhancing this over the next few years.

And Todd, I’ll just put some numbers around that. Every 25 basis point improvement in NOI margin is one share of FFO. So, again, as John said, as we see what happened to our margins, we view this as a long term opportunity.

Okay. And Heath, just for you on the balance sheet. The mortgage debt maturing through the balance of 2022, I guess, really looks like April of 2023, should we assume like my own that they're mostly repaid at maturity with cash on hand? Or are you looking to refinance any of those?

Yeah. Todd, as you remember, we did that exchange deal last year with the goal of paying off the 2022 mortgages. And the reason why we didn't pay them off right away was because the open par period is 90 days before the maturity date. So we're actually giving a yield maintenance savings by paying them off 90 days ahead. So when you're modeling the payoff of the 2022 mortgages, just assume we're paying them all off at par 90 days ahead of their maturity.

Okay, got it. And that's cash on hand and the $125 million in the short-term deposits.

Correct, correct.

Okay. Got it. All right. Thank you.

Thank you.

Thank you. Our next question comes from Alexander Goldfarb of Piper Sandler. Your question, please.

Hey. Good morning out there. So just a question going back to sort of the guidance, and you referenced the $0.06 from accounting benefit. How much has market rent growth impacted the number? So when you look back sort of six months ago when you were finalizing the deal versus now, how much benefit is from the overall market growing? I mean, obviously, it's a good thing, right? But just sort of curious for how much change has happened subsequent to you underwriting this deal, both in actual market rent growth versus also what you found as you went through the RPAI and were busy combining it with legacy KRG?

Yes, Alex. I do think that's a factor. Just look at our spreads; a 13% blended spread in Q4 for the combined company indicates that, as you've mentioned before, people underestimated the lack of supply. We're discussing demand, but we often overlook equilibrium and its role in economics. The supply side was low, which allowed us to drive strong rents. This contributed to over 10% spreads on a cash basis from our non-option renewals. As you know, non-option renewals provide tenants the opportunity to walk away from the lease without an option, and we can do the same. In this scenario, we've achieved a 10% cash spread with minimal tenant improvements needed, which offers significant margin. This reflects the current big picture: we are in the right business at the right time.

But, John, can you give some sort of perspective on how much market rent has grown in the past six months?

Yes, beyond the spreads, it's difficult for me to provide more information. I can tell you that the spreads are evident, and the leases we signed for new agreements in Q4 were over $25 per square foot. While I can't provide specifics outside of our portfolio since I don’t know what others are doing, we have been growing rents on a cash basis by over 10%, which indicates a strong market environment.

And outside of other indicators, I’d say another indicator where the market rents are going is, I can't remember being on a real estate committee and having more deals where we had multiple options for a space. So when you're in a situation, obviously, you can pick the player, and you can drive rents. It's something we haven't seen for a very long time.

And again, to the beginning of your question, that's why there was a positive mark to market on RPAI rents, right? And again, I think when we announced the deal, not sure people would have guessed that one.

Since 2004, there has been a notable lack of new supply, with previous growth primarily driven by rooftops or extensive retailer rollouts. Do you foresee any indicators that suggest an increase in supply, or the potential for rents to improve enough to make new supply feasible? Currently, there seems to be insufficient retailer demand and a limited gap between construction costs and the necessary rents to make supply a practical consideration.

I think all those factors contribute to keeping new supply at a reasonable level. You also have to remember that from 2001 to 2007, there was a significant amount of construction, much of which shouldn't have happened in the first place. It takes a long time for that excess to diminish, and that's what we've seen unfold. This hasn't been a very long period, but many people in the merchant building retail business have exited the market. As a result, those of us with extensive experience in this field expect to achieve high returns, as Tom mentioned in our underwriting. The current dynamics suggest that supply will remain constrained for some time. However, it’s possible that someone young might not understand the situation and decide to build, but such instances are rare. No offense intended to the younger demographic; that's not what I meant.

We need to be innovative, and when we examine some of our properties, we are pursuing tax financing and reducing costs while collaborating with local governments to achieve favorable returns. Therefore, we recognize that to succeed, we must think creatively and approach challenges from different angles.

That's a good point. And John, regarding your comment, we were all 28 at that time. So the experience was very limited. Thank you.

Thank you.

Thank you. Our next question comes from Katy McConnell of Citi. Please go ahead.

Thanks. Good morning, everyone. I just wanted to follow up on some of the non-core drivers within your guidance to better understand where you are coming in relative to expectations. So just wondering if you can comment on what you're assuming for total straight-line rent and size in 2022? And then on G&A, should we look to 4Q as a good run rate? Or are you expecting further synergies from the merger to benefit 1Q?

Yeah. So on straight-line, if you look at what we have in our 2022 model and you deduct RPAI’s run rate straight-line and KRG’s run rates straight-line prior to the merger, the difference is around $0.02 positive. However, that upside is split between the merger accounting that you just discussed and also new leases coming online. So again, $0.02 split between those two items. And then – sorry, what was the second part of your question, Katy?

Well, on G&A.

Yeah. Is the fourth quarter a good run rate on the G&A? Listen, there's a lot of noise in the fourth quarter in the G&A; there's temporary employees, etcetera, there's merger-related expenses. So, I would say that's not a good run rate. I will tell you that the G&A savings that we articulated on the last call, those are still intact and the timing of those are still intact. I think going across the year, I think on a quarterly basis you'll see G&A, and again, this is going to be elevated by merger costs, etcetera. You are going to see G&A somewhere around $12 million to $13 million a quarter.

Okay. Thanks. And then, now that you've broken out the office lease expiration separately, can you just speak to the 22% of ABR that expires this year? And how much of that space you could potentially get back? And just what the leasing environment looks like today?

Yes, we are experiencing a significant percentage of ABR that is expiring or coming due, primarily from two specific properties. We will be addressing approximately 150,000 square feet of that at our real estate committee meeting next week, which is a positive development. We are also continuing our efforts on another property. While the 22% range of rolling leases is noteworthy, we are not overly concerned as we are well aware of the situation. Our office components are nearly fully leased, at close to 93%, not accounting for active developments. This is a critical focus for us as we move forward, and we will be closely monitoring the office portfolio.

The only thing I would add is that when you consider it in totality against our total net operating income, it remains a relatively small number. So, while having it detailed like that is clearer, it's not a number that is particularly concerning at all.

Makes sense. Okay. Thanks everyone.

Thank you.

Thank you. Our next question comes from Anthony Powell of Barclays. Your question please.

Hi, good morning. I think John, you mentioned that you're seeing increased retail interest across the open air spectrum. Maybe you could go into some more detail on that point? What are you seeing in the grocery-anchored, mixed-use power centers and whatnot?

Yes, thank you. What we're observing is that retailers are performing well. The backdrop is that they have emerged from COVID with renewed energy and enthusiasm for their businesses. They have optimized their operations from a margin standpoint and recognize that physical retail is their most profitable avenue, prompting them to focus more on in-store experiences. For instance, if you consider retailers like LULU Lemon, Sephora, or West Elm, one might assume they fit only into lifestyle categories or mixed-use settings, but we are currently making deals with them in grocery-anchored centers, community centers, and power centers. There are numerous brands, like Adidas, that are following suit. The positive aspect for us is our strong representation across various categories, including food groups, community centers, neighborhood centers, mixed-use, power, and lifestyle. However, to clarify, we still primarily operate in the community and neighborhood segments, which account for nearly 60% of our revenue. The additional segments help us reach more customers, leading them to explore our entire portfolio. This is what I was referring to, and it’s an exciting time for our team.

Got it. Thanks. Maybe on a bad debt, the 1.5% for this year. Is that what we're actually seeing here in mid-February? Is that kind of what the actual number of kind of delinquent tenants in the portfolio right now?

For the year 2021, the rate was 1.5%, but it was skewed toward the beginning of the year. By the fourth quarter, it was closer to 75% to 100%. That rate is not reflective of our most recent situation, but we believe it to be a conservative estimate. We have no reason to anticipate significant credit losses, and our watch list is currently smaller than ever. Many of the weaker tenants have already exited during COVID. However, as John pointed out, we are not completely out of the woods yet. We established a figure we felt comfortable with and are ready to exceed it, assuming the situation does not change drastically.

Got it. So assuming there's no, I guess, major COVID setbacks, it’s safe to assume even though your guidance is 1.5%, you should probably exit the year closer to that normal range? Is that fair?

Yes, I mean, I would say we're entering the year feeling like that will be there. I think we guided to something at the midpoint that was conservative because last summer we also felt the same way and things changed a little bit. I highly doubt we'll go down that path that we did last summer where it got worse after the fact, but that's why when you sit down at the beginning of the year and you're going through all your numbers, you do something like that, Anthony. But now we're entering in the year well below the 1.5%.

Thank you.

Thank you. Our next question comes from Wes Golladay of Baird. Your line is open.

Hi, everyone. Can you talk about your expectations for leasing this year? Can you achieve the $5 million volume again? Are you going to pivot more to small shop? And then lastly, can you talk about what you've seen on the tenant short environment?

Let me begin with that, and then Tom can elaborate. Looking at 2022 and comparing it to 2023, we have a positive outlook for this year as well. Despite some residual effects from the earlier fallout affecting our properties, which has created a notable gap between leased and occupied spaces, we see significant potential for growth. While we do not provide exact leasing percentage targets due to various factors that influence them, we anticipate that in the next 24 months, our leasing percentages will return to levels similar to where we were previously, which should increase our funds from operations per share significantly. Overall, I believe things are moving in a favorable direction.

I'll talk about the boxes just real quickly, because they are obviously huge drivers of lease percentage. If you take a look at what we have accomplished in the last year, we executed 27 deals, 27 boxes with a spread of 12%, but more importantly, return on capital is 29%. The remaining 36 boxes that we have actually have a lower ABR at about 11.85%. So once again, we feel like there's great spread potential there. But more importantly, our pipeline to that 36%, we're planning on putting a significant dent in that number. So, we're looking for a big year of leasing without question. We've got this new combined team and everyone's going to drive to the finish line. I can assure you that.

Hey, Wes. I want to add one more thing. If you compare our lease rate at the end of 2019 to where it is at the end of 2021, we have one of the highest spreads. There's an additional 270 basis points of opportunity just to return to our 2019 position. Along with my previous point about our FFO per share already being 50% higher than pre-pandemic levels, we also have significant potential for further leasing ahead of us.

Got it. I want to revisit the market commentary or questions. Was the initial expectation for the RPAI portfolio to achieve above-market rent when the assets were acquired? Based on the S4, it seems there will be some challenges to earnings this year on the pro forma. It also looks like market rent may have strengthened, or perhaps you have a better understanding of the assets and see more potential in them. Is that what happened?

No, I wouldn't say we initially believed there was any above market rent. We thought it would be neutral. However, as we examined it more closely, involving a third party, we discovered some positive rent indicators. Regarding the S4, I suspect straight line rent was factored in as well. Ultimately, we recognized there was potential for growth from leasing, operations, and personnel, which is why I mentioned this opportunity at the conclusion. It's easy to look back now and think it was a straightforward decision, but it was a different scenario last April when we began discussions, and we positioned the company uniquely to take advantage of this opportunity. I think people will reflect on their experiences and maybe appreciate the foresight we had in recognizing this significant deal.

Yeah. You definitely got the cap rate compression tailwind instance. So congratulations.

Thank you.

Thank you. Our next question comes from Linda Tsai of Jefferies. Your line is open.

Hi. Good morning. On the same store guidance of 2%, the range of 1 to 3, what's the balance of revenue growth versus expense growth?

The balance of revenue growth, the data drivers, as I said in my comments were basically occupancy and rent bumps. So in terms of the expense growth, I think that's, again, where we're going to be trying to improve our margins over time, but I don't think you're going to see a huge pickup immediately over the course of the year. It's going to be heavily weighted toward the revenues.

And then, Linda, the other thing to remember there is, obviously, that includes the 1.5% bad debt. So that's your range really in the sense that if we were trending to more what we have been historically, it's probably closer to the 3% than it is the 2%.

Got it. And then why did economic occupancy decline 30 bps?

Yes, that was part of the same store pool. This only reflects the historical KRG portfolio since we didn't include the RPAI portfolio. The 30 basis points was influenced by one deal, specifically the Burlington that vacated one of our assets. Having a small denominator makes it easier for one deal to significantly impact our numbers. However, it's important to note that the lease rate increased by 30%. That's the figure we focus on. The space previously occupied by the office tenant that left is now being filled by Burlington. So, one anchor deal of 30,000 square feet had a meaningful impact.

That's the right trade.

Yeah. We'll take that one.

And then just on the new cash spreads being so strong. Can you just talk about what's driving that? And to the extent that's repeatable?

Yes, I mean, look, Linda, like we talked about, really it's just everything. It's the real estate, it's the environment, it's the fact that we're still backfilling old Stein marks. It’s a chunk of that that we talked about last year; we had more exposure than anybody else to that particular tenant, but the positive of that was, that particular tenant paid single-digit rents. So that's a factor. I mean, look, as I said, we're sector leading at 13% blended spreads; will that moderate over time when we fill up those boxes? I'm sure it comes down a little bit. But the reality is, as long as we're generating near or above these double-digit spreads, we're in a very healthy environment with limited supply. So, I feel pretty good about our chances of being able to outperform.

Thanks.

Thank you.

Our next question comes from Chris Lucas of Capital One. Please go ahead.

Good morning everyone. I wanted to revisit the tenant retention question that was raised earlier. I'm curious about how that is looking this year compared to pre-COVID levels. Additionally, are you noticing that anchors are approaching you for early renewals at a higher rate than before?

Hey, Chris. Yes, I think the retention is back to where it was before COVID, sitting a little over 80%, probably around 83%. I don't have the exact figure in front of me, but over 80% is where we prefer to be. It's important to note that some of the retention loss is intentional on our part; for example, we may choose not to renew clients who don't opt for rollover. So, being over 80% is a solid position for us and aligns with our historical performance. Regarding early renewals, we are certainly having those discussions. With our more significant portfolio today, which has a greater impact on retailers, I believe we will be engaging with them much more actively at the beginning of the process.

A lot of that will just relate to where they sit in the market currently. We feel like we have a strong market rent, and they want to come in and work with us on a 10-year deal versus a 5. We're always willing to listen to that, but it's going to come down to basic economics.

Thank you, everyone. Heath, regarding the same store guidance, you mentioned in your prepared comments that you have a different approach to bad debt and RPAI. How does that affect your same store guidance? If it does not, what should we expect that number to be compared to prior periods?

In terms of prior period data and 2022, we have about $18 million, which I consider to be the good news bucket. Approximately $7 million of that comes from tenants who have vacated, and the remaining $11 million is from tenants who have not vacated yet. While there may be some positive news from previous periods, we did not factor that into our guidance. Regarding the same store and bad debt assumption, if you were to refer back to the historical bad debt run rate of 75 to 100 basis points, that 2% figure effectively translates to 3%. This is largely due to the conservative assumptions we made this year. Additionally, as I mentioned earlier, the $33 million coming online is significantly weighted towards the second half of 2022. Many of our peers are seeing that spread occur in the first half. Overall, this positions us very well for 2023.

Okay. Thank you guys.

Thank you.

Thank you. Our next question comes from Craig Schmidt of Bank of America. Please go ahead.

Thank you. Regarding leasing volumes, do you anticipate that Kite can maintain above-average leasing volumes in 2022? And where do you think that total leasing volume might come out at?

We are not providing specific guidance on leasing volumes, but we believe that the trend will continue not only in 2022 but also in 2023. As Heath mentioned earlier, we are working on several deals, and our investor presentation highlighted our development pipeline that Tom discussed. We are getting back to pre-COVID levels, and I believe the pipeline will remain robust. Our spreads should also stay strong, so leasing volume will reflect the quality and quantity of available deals right now. Therefore, I think it will continue.

And the only other thing I'll add, Craig, is you have two teams now that have been put together, and there's a lot of energy behind these groups. And we set them up to be successful. So, we're already seeing the benefits of that. And this new focus tying in the Kite culture, we are expecting big things as we keep pushing forward.

The only thing I'd add to that, Craig is I wouldn't really focus on quarterly volumes; it happens over a year. I know people write about our quarterly leasing number. It's just kind of a meaningless number amongst what we're really doing. This plays out over a longer time.

Is this just a change in approach from the retailers that they want more bricks and mortar locations? I mean to have such an elevated period of leasing, at least in your mind, for 3 years, it would seem that you need to have a fee change in terms of your approach to the business?

I believe this has been a common topic among companies recently, highlighting that the only profitable way to retail products is through physical stores. Other methods simply do not generate profit. However, I must mention that online purchasing with in-store pickup and curbside pickup significantly alters the landscape. Most of our major retailers are now engaged in these practices, as they recognize the importance of drawing customers to stores due to the higher profit margins compared to shipping from a warehouse, which has become quite costly. This shift reflects a new understanding of the market, and open-air retail has greatly benefited from these changes. Additionally, the strategic decision we made for the deal was based on this awareness of the market trends, the quality of the real estate, and the potential for growth, which we have now presented for everyone to see. We're just at the beginning of this progress.

Great. And then what do you think your estimated annual redevelopment spend will be? I think you have $105 million in current active, but what is maybe an annual target?

We are not setting any annual targets. This is more about maintaining internal discipline. When we set targets, people tend to chase them, and we do not want to pursue deals solely because of a target. Our focus is on achieving high risk-adjusted returns. Regarding the $105 million, that represents our active development pipeline, which includes some redevelopment and new development, and it is only $100 million in spending for a company with nearly $8 billion in assets. This amount is relatively minor. We will pursue opportunistic deals that generate the returns we, as experienced players, require to justify a deal instead of allocating capital elsewhere. We also mentioned having that $105 million and an embedded land bank, which we intend to monetize in various forms over time. This is why we provided examples in our investor presentation about different development approaches that lower risk and improve terms through joint ventures, sales, or 100% ownership, depending on the deal. We have been in this business for a long time and have navigated many cycles, witnessing both successes and failures. Therefore, we believe we are well-suited to manage this pipeline effectively.

Great. Thank you.

Thank you.

Thank you. At this time, I'd like to turn the call back over to CEO, John Kite for closing remarks. Sir.

Okay. Thank you very much to everyone for joining today. I hope you can hear, if not, see our enthusiasm that we have going forward for the next several years for this great company. And we will see a lot of you in the next couple of weeks in person; I'm really looking forward to the opportunity to further discuss. Thanks and everybody have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.