Thank you for standing by and welcome to the Kite Realty Group Trust First Quarter 2022 Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Bryan McCarthy, Senior Vice President Corporate Marketing and Communications, please go ahead.

Thank you, and good morning, everyone. Welcome to Kite Realty Group's first quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures, please refer to yesterday's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group, our Chairman and Chief Executive Officer John Kite, President and Chief Operating Officer Tom McGowan; Executive Vice President and Chief Financial Officer Heath Fear; Senior Vice President and Chief Accounting Officer Dave Buell, and Senior Vice President Capital Markets and Investor Relations, Jason Colton. I will now turn the call over to John.

All right. Thanks a lot, Bryan, and good morning, everyone. As you can imagine, our team has been counting down the days to yesterday's release and this morning's earnings call. We're eager to share details regarding our exceptional first quarter results and outperformance across the board. 2022 is shaping up to be a monumental year for KRG. It goes without saying that we have high-quality real estate and high-quality places. But that really doesn't mean anything without a high-performing team that communicates well and works in lockstep towards our operational goals. For those of you that were concerned about how our ability to swiftly integrate post-merger, you can rest at ease. As reported yesterday, KRG had FFO per share of $0.46, beating consensus estimates by $0.05 per share and representing a 35% increase per share over the comparable period last year. Our same property NOI growth for the quarter was 5.9% as compared to the same period in 2021. Heath will give more details around the components of each metric but suffice to say we blew past expectations due to a combination of operational outperformance and lower bad debt. As invigorating as this past quarter feels, I'm even more energized about the future based on our tremendous leasing results. KRG signed 182 leases representing over a million square feet this quarter, including nine anchor leases. The strong leasing volume was bolstered by 16% blended cash spreads on comparable new and renewal leases. These spreads were 3% higher than the blended spreads we achieved in the fourth quarter of 2021. I'm going to speculate that once again these blended spreads will be amongst the highest if not the highest in the sector. I'd also like to call out the cash spread on our first quarter comparable non-option renewals was approximately 12% against the backdrop of a 90% retention ratio. Again, this is an important indicator of where market rents are headed for the KRG portfolio. KRG is experiencing strong demand from a deep and diverse set of retailers across all of our open-air products. In fact, our national retailers are becoming increasingly agnostic to format type and more keenly focused on best-in-class real estate. This dovetails nicely with our diverse set of high-quality and well-located properties. Retailers are not only flexible with respect to format but are also willing to modify typical sizing of their space. The current environment has led to some very long and productive lease approval meetings where we're seeing multiple tenants vying for the same space, or tenants that are willing to occupy spaces that have been persistently vacant. We intend to ride these tailwinds into historically high occupancy levels. The portfolio has signed not-open NOI of approximately $37 million, which will primarily come online during the back half of 2022 and the first half of 2023. This is an increase of $4 million as compared to last quarter, which is the result of $11 million of new sign-not-open NOI partially offset by $7 million of new NOI that came online this quarter. The spread between leased and occupied for our retail operating portfolio has also grown to 320 basis points. This bodes extremely well for our growth trajectory going into 2023 as the rents from those leases will be fully realized. As a reminder, the $37 million of signed-not-open pipeline represents 7% of our projected future NOI growth, as shown on page seven of our investor deck and is only a portion of the near-term growth opportunity. 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 $31 million of NOI coming online over the next several years. We've also been busy on the capital allocation front. We acquired two attractive Sunbelt assets for a total of $66 million. The first of which was Pebble Marketplace, a Smith-anchored center in the desirable Green Valley area of Las Vegas. We also acquired a Sprouts and Total Wine that are literally attached to our MacArthur Crossing center in the Las Colinas area of the Dallas MSA. We love adjacency acquisitions, especially when they can create a halo value by compressing the cap rate on the balance of the center. Collectively, these two assets feature a three-mile population of over 116,000 people and an average household income of $115,000. We've also made progress on the development front. All of our active developments are coming along on time and or under budget. That's for the entitled land bank, we've unearthed additional value propositions as promised, and we're taking a bespoke approach to every single parcel. Over the course of 2022, we look forward to sharing our creative vision for maximizing value and minimizing risk. The best thing about the entitled land bank is that the investor community historically attributed very little value to the land. And we certainly didn't put a price tag on it when we were underwriting the merger, but we see excellent opportunities ahead. The culmination of all the great things I've discussed is allowing us to raise our 2022 FFO as adjusted guidance to $1.77 per share at the midpoint. We're also raising our 2022 same property NOI growth assumption to a range of 2.25% to 3.25%. Before turning the call over to Heath, I want to address some of the macro elements that are on the horizon. REITs have historically outperformed broader markets during inflationary periods. As prices rise and sales increase, it follows that the tenants' occupancy costs should decline allowing us to continue to drive rents. As an open-air shopping center owner, we have a healthy balance between the duration of our assets and liabilities. Based on our embedded escalators and our ability to turn over 10% to 15% of our leases every year, we feel well-positioned to keep pace with inflation. Likewise, our longer lease durations temper the impact of any potential recessionary environment. On the supply chain front, we're acutely focused on ensuring all tenant buildouts are on time and on budget. Internally, we've been referring to 2022 as the year of the RCD, which stands for rent commencement date. Times like these are when KRG's hands-on management style shines. We have very experienced tenant coordination and construction teams that not only ensure we deliver on time but help tenants with any challenges they may experience. Due to our tenacious and dogged approach, we're currently outperforming on deliveries. Finally, I want to address the change to our share buyback program. The primary purpose is to properly size this critical capital allocation tool in light of our post-merger market capitalization. With that said, we are keenly aware of the disconnect between our stock price and our underlying fundamentals. We have great real estate and a best-in-class platform, and we will continue to outperform until that disconnect resolves itself. Whether you're a value investor or growth investor, I can't think of a name in our space that screens more attractively. As always, thanks again to the entire KRG team for their hard work and dedication. KRG is nothing without these amazing people. I can't emphasize enough how proud I am of what we've accomplished as a team. But more importantly, what we will accomplish together in the future. Now I'll turn the call over to Heath to provide more details.

Thanks to all of you for joining us today. What a great quarter and what a great sense of pride to see what our collective team has accomplished and will accomplish over the course of 2022, one team, one focus. As always, our goal is to provide our investors with transparent and best-in-class disclosure, which will be much easier on a go forward basis now that we've had our first full quarter of combined results, let's dive in. For the first quarter, KRG generated $0.46 of FFO per share, both on a NAREIT and on an as adjusted basis. As compared to NAREIT, our as adjusted FFO results exclude the positive impact of $1.1 million of prior period collections offset by a $900,000 add back of merger-related costs. Our same property NOI growth for the first quarter is 5.9%, when excluding the impact of prior period collections. Please note that unlike last quarter, the same property pool for the first quarter includes both the KRG and the RPAI legacy assets. 500 basis points of this growth was driven by higher minimum rent in overdrafts, with the balance being attributed to lower bad debt. Please note that the first quarter same property NOI is elevated due to heightened reserves taken in the first quarter of 2021. As you may recall, there was a lot of uncertainty in the first quarter of last year with COVID. As the macro environment stabilized and collections returned to historical norms, many of those reserves were reversed in the second quarter. So what does this all mean? We expect our same-store results to be muted in the second quarter and then accelerate to the second half of 2022 as we begin to receive some of the $37 million of signed-not-open NOI. Page eight of our investor deck will help you understand the cadence of the rent commencement dates. Hopefully, this will help contextualize our full year same property NOI outlook. As detailed on page 26 of our investor deck, our balance sheet and liquidity profile not only remains solid, but continues to improve. Our net debt to EBITDA was 5.7x down from 6x last quarter. We had to end the $37 million of signed-not-open NOI. Our net debt to EBITDA would be 5.4x. 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 raising FFO as adjusted guidance to $1.74 to $1.80 per share. The variance from FFO is approximately $0.02, which represents our estimate of $4 million of non-recurring merger-related costs. The $0.05 increase at the midpoint is attributable to cash items with leasing outperformance, termination fees and accelerated development fees. At the midpoint of our FFO adjusted, we lowered our bad debt assumption to 1.25% of revenues. While the current reserve is significantly higher than our historical bad debt run rate, it by no means represents any specific credit concerns. Rather, it reflects our continuing conservatism with respect to macro uncertainty that is not within our control. It's important to note that despite our recent acquisition activity, our guidance still assumes the net transactional impact will be neutral to earnings. Before turning the call over to Q&A, I’d love to address one additional macro item, which is the recent rise in interest rates. We are in the business of owning and operating best-in-class real estate, and we are by no means in the business of interest rate speculation. The primary tool we use to manage interest rate exposure is to maintain a well-laddered maturity schedule that allows us to average our cost of debt over time. In terms of our planned capital markets activity, we intend to be optimistic this year. And when the time is right, we will start to retire our 2023 maturities. 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 Michael Billman from Citi.

Hey, John. I apologize. I joined on a little bit late. But I really enjoyed if you can sort of outline capital recycling and I guess sort of your plans to both acquire but try to dispose assets following the merger, I'm sure a relook at the portfolio could lead to incremental dispositions. It means talk a little bit about what your plans are?

Sure. As we mentioned earlier, we've recently acquired two properties for $66 million. We still plan for all our acquisition and disposition activities to be neutral to earnings this year. Specifically regarding the two properties we acquired, we expect to offset these purchases with some dispositions—one of which is under contract while the other is in negotiations. Overall, our portfolio is performing well and we're pleased with the results. However, we are always looking for marginal improvements. We're not planning any huge acquisitions or sales since our balance sheet is in solid shape. Our approach will be strategic, similar to our recent acquisitions, and we'll likely leverage current market conditions for future matching funding. We truly value our portfolio and are happy with the results we're achieving.

You don't feel a need to go deeper, putting aside potential dilution, but just looking at this combined portfolio and taking a deeper cut about sort of where you want to be. Obviously, you have a big Sunbelt portfolio, but you went more coastal and northeast with the merger. I just didn't know whether there's an opportunity to recycle more, to bring your portfolio more where you'd want it to be.

Yes, as we progress through the year, our decisions will likely take those regions into account. However, I've mentioned previously that considering the assets we've acquired through the merger, particularly in Seattle, DC, and Long Island, we have some excellent properties. Therefore, the focus is not really on the composition of the portfolio from the merger versus what we had before. Instead, it remains our usual practice: if we believe a piece of real estate has reached its maximum value or is experiencing a decline in value, we would consider selling it. It won't be a significant change resulting from the merger.

And just a second question, John, with ICSC coming up, obviously, since the big first, in-person event with the combined company, kind of like December, you have that much going yet. Just talk a little bit about what the goals are going to be for the combined organization at the conference, what sort of roster meetings you had and really what you're going to try to accomplish at the convention a couple of weeks.

Sure, I'll start but let's kind of Tom dig into that. But from a macro perspective, I mean, we have great momentum, great tailwind, right now our portfolio is performing at one of the highest levels in the business. So we're just going to look to lean into that and continue to push relationships that we have and that we've grown into. And when you look at our results from the past quarter and the size and the depth and breadth of the leasing that we did and the spreads that we generated from that. That's what we'll continue to do, Michael. So it's really more and as I tried to say in my prepared remarks, this is an integrated one team, one focus company, and the idea that we have any issues regarding that that's gone. So now it's leaning into that and really expanding our relationships. But Tom, you want to talk about some specifics, maybe?

Sure. I mean, I think it's critical that we hit all of our property types. And we have a more diverse base that we'll be coming to Vegas with and it's going to be critical that we nurture our existing tenants but really focus on a lot of these new relationships that we're seeing and particularly in the lifestyle centers. We're doing deals with some great tenants that haven't traditionally looked at coming out, people like the Buckle, Nike, Airy. I mean, there's a whole host of those tenants that we want to continue and expand those relationships. So we have as diverse an outline of a tenant base as possible. So we have a lot on our plate. We have a group coming, and the rule is if you're out there you got a full book. So we're looking forward to it.

Great, guys. Thanks for the time.

Thank you. Our next question comes from the line of Floris Van Dijkum from Compass Point.

Thank you for addressing my question. It's clear that the results have exceeded expectations and you've raised your guidance. However, the new guidance suggests a slower pace of funds from operations compared to the first quarter. Are you being a bit too cautious? I see that you've reduced your bad debt somewhat, but it still appears to be quite high at 125 basis points. How much more potential do you think there is for earnings this year?

Yes, Floris, you are correct in your assessment, but as we mentioned in our prepared comments, we are only four months into the year. Therefore, when looking at projections, it's important to remain cautious, and the 1.25% bad debt is the main factor influencing the pace you referenced. In the first quarter, our bad debt was below 1%. If we continue on our current path, we anticipate performing quite well, but since it's still early in the year, we have made some adjustments. Nonetheless, we are very optimistic about the current outlook. Based on our leasing performance and the rent spread we can achieve on a cash basis, we feel confident. Heath, do you have anything to add?

Yes. More specific items, floors that are having a cadence sort of slow, is, we have term fees, as this quarter, our budget doesn't have any term fees in it whatsoever. So that's sort of an item that's not budgeted for the balance of the year. We’ve outperformed an overdraft, which is great. And G&A timing, so the G&A was late in the first quarter. And as we go through the balance of the back half of the year, you're going to see the G&A pick up permanently due to some IT projects that we're undertaking in the back half of the year. So that's why the cadence isn't exactly the same.

Got it. And just I know, the S&L pipeline appears pretty impressive at the levels that you guys have it particularly it's almost the same size as one of your peers who has a portfolio that's twice the size. But maybe talk about some of the additional stuff that you guys have here. In terms of your additional potential lease up, I think you'd said about $21 million of additional potential rental income or 4% of your NOI, what is your x? What do you think is possible you said, you can get back to pre-COVID occupancy? Can you remind us, again, what that was, particularly in this small shop space versus where we are today? And do you see a scenario where you could actually exceed pre-COVID levels?

Well, pre-COVID on the small shops, Floris, we're at 92.5% which was sector-leading. So, we think we can get back there. That's what we do. We execute, and we have to go out and lease that space. And then, the anchors are pre-COVID, where 98%? So do we think we can get back there? We absolutely do. Does it happen just by saying it? No, you have to go out and execute. And we feel confident in that ability. But yes, that's why we pointed out, and if you look at our investor deck, there's a great page seven, which kind of highlights that and makes it pretty easy to do the math. And it makes it pretty easy to do the disconnect between current stock price and real values. So, yes, we think we can get there. We got to do the work. And that's what we're going to do.

Thanks. Maybe the last question, for me. Maybe talk about, you talk about the match funding? I mean, would it be right to assume that some of your land holdings, which you estimate could have a value of $125 million to $180 million? Are those likely candidates for monetization?

Yes. I mean, I think we mentioned in our remarks, Floris that we are not only do we have the lease up to pre-COVID, the S&O. The active developments, which are in lease-up right now. And under construction and on pace. We have the land holdings. And one of the beautiful things about that is that we certainly attributed no value to that in our analysis of the merger and knew that it was upside. And so it gives us the opportunity and the luxury of taking our time on a case-by-case basis, which is what we mean by bespoke, right? That we're going to take our time on each individual landholding. And then, they vary dramatically in terms of stages. And, for example, since the DC market, well, One Loudoun is a spectacular property. So we have a lot of optionality is the word I would use. So that's a long way of saying, sure, there's a possibility that we would look to utilize sales proceeds there in some form or another. But there's also the possibility that we have a few assets that are, we could maximize the value and recycle that capital into higher IRRs. So that's what we do. We're always analyzing where's the highest IRR we can get with the least amount of risk. That's our primary job. So we're going to look at all those things.

Thanks, John.

Thank you.

Thank you. Our next question comes from the line of RJ Milligan from Raymond James. Your question, please.

Yes. Hey, guys. Good morning. I was just looking for a little bit more color on the leasing spreads. And I know one specific quarter doesn't necessarily make a trend, because there could be one or two large leases that that move it either direction. But I'm just curious. I mean, the trend has been positive or increasing over the past couple of quarters. I'm just curious, is there a specific box type that's driving those higher rents or specific category that's driving those higher rents?

In this quarter, each quarter has its unique characteristics, but this one was particularly noteworthy due to the number of deals and their diversity. We had significant leasing activity in various lifestyle deals that yielded very strong results. Overall, we executed around 24 new leases. Additionally, the non-option renewals at 12% were impressive, with about 45 deals contributing to this success. Tom, would you like to elaborate on this further?

So when I mentioned about making sure we're expanding our tenant base and looking for new opportunities as we try to grow this portfolio, one of the big drivers was a simple fact that in our lifestyle centers, we picked up new names to the company, people like the Buckle, Nike, Harry, Hay Day. I mean, they go on and on. But we also had strong furniture store comps in different areas where we had a tactical. So it was definitely spread out. But these higher-end tenants that may not typically come to open air clearly drove us and the box side held up very strong, even though there were only two comps, in terms of that percentage as well.

Okay, great. And then, my second question is just how are you thinking about? And I think, John, you made some comments earlier on the increase of the buyback program, which is reflective of the increased size of the overall company. But thinking about the balancing between leverage and buying back shares given the discount that they're trading at. So just how do you think about utilizing that program over the course of the year?

Yes. I mean, I think it's exactly what we laid out, RJ, which is that we wanted to make sure it was sized appropriately. So that's the first step. You're right, that whenever you look at this and you're trying to determine capital allocation, that you have to look at that your balance sheet in conjunction with what you might be doing on the capital front. As Heath mentioned, right now, our balance sheet is extremely strong and trending even stronger. And we produced fabulous results this quarter. We've got a lot going on. We have a lot of upside. So it needs to be there in the case that that disconnect isn't resolved naturally. We think it will be. I think in a couple of weeks when we see the first quarter results of shareholder buying. And I think there's some really, really great names that have come into our name and some pretty smart investors, pretty astute. So hopefully that helps as well. But bottom-line, we're going to keep driving, keep operating, keep producing. And we hope that takes care of it. But if not, that's an option that we need to have available to us.

So I guess, in summary, not buying, probably wouldn't be aggressively buying shares at this price today. But if the discount persists, that's a potential for maybe the back half of the year.

Yes, I don't want to speculate on timing of it RJ. It just it's what I said. I mean, we need to have this available to us. We believe, like many others that the current value doesn't reflect the value of the business. There's a lot of different ways to squeeze that value out. That's just one of them. But I think there's a lot of people who recognize this as a pretty solid platform and has a lot of upside.

Great. Thanks guys.

Thank you.

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

Good morning. I have two questions. First, regarding the signed-but-not-yet-open contracts. We've noticed that among our peers with substantial pipelines, there's often a significant delay before these contracts start contributing to earnings. This creates a gap between occupied spaces and those that are signed but not yet open. I want to avoid overestimating in our models. Are there any offsets to this? Are you actively working to replace weaker-performing tenants? Even though you're generating $37 million in annualized revenue, is that somewhat balanced by the challenges of weeding out lower-performing tenants? I’m trying to understand how much of this revenue actually translates to earnings, especially given your active management of the portfolio in response to demand, and how this gap may last longer than our assumptions based on the data presented.

Yes. So I think there's really two things that will offset that growth. One is just bad debt, right? So what's your bad debt NOI? And it says 75 basis points of revenues, which is a typical run rate here, that's 1% of NOIs being just that. And then, that's your natural explorations. But as John mentioned in his opening remarks, we're sitting at 90% retention right now. So that feels really good. So I think at the end of the day, in order for us to realize that $37 million, we have to grow that occupancy, right? We have to shrink the spread between leased and occupied. I think you're going to see it be fairly elevated even through the course of next quarter because the leasing velocity today has been so great. I don't see it closing anytime soon. But in the meantime, we're opening up NOI now. When John said in his remarks, we signed $11 million of new NOI in the first quarter and seven line of signed-but-not-open. So that's why opened only went up by $4 million. So again, yes, there are some natural offsets to it. And the underlying assumption here is you have to grow your economic occupancy, which we intend to do. So –

Yes, I mean, personally, Alex, I look at it, it's an extreme positive. The only offsets would be just whatever's happening naturally in the business and being at a 90% retention rate when we historically were in the mid-80s, I guess, that's a big deal. And again, that's why I keep mentioning the non-option renewals spread at 12%. So assuming that things stay as they are, I see it as significant upside.

John, don't get me wrong. I agree. I just, it's awesome. It's just us getting in reality checks so we don't overdo things.

Yes, that's why we wanted to be clear about the timing right, that it's very back half 22 weighted and then 23. So, I think it's never easy from your chair to figure that part out. But it's clearly a driver into 2023.

Yes. Okay. And the second question is, a lot of headlines recently declining online sales, while physical store sales are rising. Obviously, I think collectively we all like that. But wide enough Amazon shareholders on the line. But when you think about that, is it reality that online sales truly are declining in physical stores arriving or are the tenants themselves starting to reallocate and say, hey, it's not the point of purchase, where we're going to flag it. It's the point of where the fulfillment point. So if it's been curbside pickup or delivered from a store to someone's house, we're going to start crediting those at the store sales. So I'm trying to figure out how much is actual true changes in online sales versus in-store sales, versus the tenants reallocating where they're giving credit for those sales.

I can't speak much to the reallocation aspect of your question. I don’t feel that’s driving this macro trend. Honestly, as we discussed extensively during COVID, physical retail became increasingly important to people over time. A connection was established during that period where physical retailers could serve their customers more swiftly than online. I recall you mentioning this in notes from several quarters ago, where it was evident that online penetration was slowing. Ultimately, it’s all interconnected. The only significant online-only retailer is Amazon, and even they are not truly online-only anymore; everything else is linked to our tenants and customers. Regarding foot traffic, we had over 100 million visits in a quarter for just one company in the open-air space. This indicates clear momentum, and it’s reflected in our results. I am very optimistic about this trend, which underscores the strength and significance of physical retail in the distribution channel.

Okay. Thank you, John.

Thanks.

Thank you. Our next question comes from the line of Todd Thomas from KeyBanc Capital. Your question, please.

Hi, thanks. Good morning. John, you mentioned in your discussion about the leasing spreads during the quarter that the lifestyle segment was particularly strong. And you picked up a number of lifestyle assets and assets with greater lifestyle tenant mix, I guess, with the RPAI portfolio. Curious if you could, talk a little bit more about that, how that product is performing and recovering at this point in the cycle.

As both Tom and I mentioned, we achieved very strong results across multiple properties in that segment. For us, there is a blend of lifestyle and mixed-use, which we view as quite similar. It really comes down to a nuance in definitions. When examining the number of deals we completed in the quarter, it was well-balanced across all our property segments, including grocery, power, lifestyle, mixed-use, and community center segments. As Tom noted, there is an interplay among these products with the same retailers, who are realizing significant sales in our properties at lower occupancy costs, resulting in more EBITDA for them. I don’t want to get too focused on any particular category of our products, as they are all performing exceptionally well right now. One of the reasons we were excited about the deal we made is that it gave us greater exposure to mixed-use and lifestyle than we had before. We recognized at that time that there was a huge growth trajectory, which we are now witnessing. The concept of open-air spaces is proving to be a very productive asset for most of the retailers we engage with, and I feel very optimistic about it currently.

Yes. And there's no doubt that trends nationally are that people want to be together to live, work, play. I just heard a ULI speech on it yesterday of 1000 people within a one block is how you activate. So all these lifestyle centers are providing that to the properties, which just allows us to kind of ride this wave of positive momentum.

I agree, Tom. I think the pent-up demand for experiences is another reason why we really liked the lifestyle center sector. And I think is also part of the reason of why you're seeing Amazon sales taper because you can't sell an experience online, right? So again, all good stuff. And we really, really appreciate the exposure to this new sector for us.

Are the occupancy gains and is the rent growth that you're experiencing in that segment? Is it outsized today, as you kind of look out over the next several quarters, is it outsized relative to the community and neighborhood centers?

I don't think so, because when you examine the totals and averages, they really even out. There are certainly some standout deals, like the spectacular property in South Lake, Dallas, which offers big opportunities for rent increases. However, we also see significant potential for rent growth at a public center in Naples. Given that demand is driving the market and supply has remained relatively stable over the past decade, basic economic principles are working in our favor and should continue to do so. As Heath mentioned, the combination of necessity and entertainment places us right in the midst of current economic trends. It's important to remember that despite prevalent negativity in the world, there is still a considerable amount of pent-up capital ready to be spent. I believe we're well-positioned for that. Regarding mixed-use and lifestyle developments, we're also gaining more exposure to the multifamily sector, which presents additional opportunities.

Okay. And then, in terms of tenant retention, you mentioned there was about 90% in the quarter, how long do you think these elevated levels of tenant retention could persist?

It's difficult to make a definitive call on that. Currently, as we assess the quarter we're in, things feel very positive. That's why we decided to raise our guidance while still exercising some caution due to the broader economic environment. However, on a more localized level, we are in a strong position, and our portfolio is exceptional and competitive. I believe people are starting to recognize that. We're optimistic about maintaining this momentum, but it's important to note that the situation can be unpredictable, and one quarter may differ from another. Therefore, I prefer to analyze trends over a longer timeframe rather than focusing solely on quarterly results.

Supply is definitely tightening, which is going to work to our advantage.

Okay, it's helpful. And just a last one, if I could real quick on the investments completed in the quarter and after the quarter. Can you provide a cap rate, I guess, on pebble marketplace in the two boxes at MacArthur center?

We didn't formally release those, but I can say that the market cap rates were in the fives. As I mentioned, we are looking to recycle and, frankly, we're expecting tighter, lower cap rates than what we purchased.

Okay, all right. Thank you.

Thank you.

Thank you. Your next question comes from the line of Chris Lucas from Capital One. Your question, please.

Hey, good morning, everybody. Just a couple of quick follow-ups. More definitional than anything. Just as it relates to the retention rates for the quarter. I guess, John, just thinking historically, is that as good as you've seen, have there been periods when it's been higher?

That's very impressive. Chris, I believe 90 is quite remarkable. I can't recall it being much higher than that. Honestly, it's not usually the main focus when considering new leasing, but as we enter new leasing agreements due to having fewer spaces, it becomes increasingly important. Right now, it’s in an excellent position and very profitable.

Okay. So as we think about retention, should we assume that like in the current environment, you're thinking that retention and tenant fallout are sort of the same thing, but that at some point down the road that those could diverge as you actually try to push?

Yes. I mean,

potentially lose tenants as a result.

Sure. When we return to the occupancy levels we had before COVID and achieve 98% occupancy, with anchors at 92.5% in the shops, we begin to price more dynamically. We might let some things roll over, but I wanted to emphasize the non-option renewal spread, which shows that we weren't renewing tenants at low spreads. In fact, the non-option renewal spread was quite significant; the option renewal spreads were probably around 6.5%. This indicates that when we had the opportunity, we were able to adjust prices effectively. As we continue to lease space, our focus shifts away from that specific number, as we are more concerned with maximizing the marginal dollar. It's also important to maintain a balanced merchandising mix. Therefore, it's not ideal to concentrate on just one metric; our primary goal is to consistently increase EBITDA, free cash flow, and earnings.

Thank you for that. Regarding the schedule for S&O, how do you determine when that rent is expected? Is it based on construction and permitting timelines, or is it tied to a specific lease contract date?

Well, Chris, there's typically a formula and the lease, there's also a drop dead date. So they have to start paying rent after a certain period of time after they've been open. And if they're delayed being open, whether it's their fault, or our fault, or it just doesn't happen, they end up paying rent anyway. So again, it's a mixture of what you ask.

Yes, Chris, our primary goal, there is really taking care of our customers as much as we possibly can. So we obviously want to get the right commencement date as soon as possible, but we want a successful customer and unhappy customer. So it's a balance, and we drive it, but clearly right now, it's working pretty well.

And as John mentioned in his remarks, Chris, we are actually ahead of schedule in terms of our average weighted opening date. So the team has been doing a fantastic job and getting people open.

So Heath just on that, let me just understand. So when you say ahead of the average expected opening date, is that based, again, on sort of like your expectations based on construction and permitting and all of that, or is that based on that drop dead date? Because just trying to see how much are sort of think about how much excess performance is sort of built into sort of the S&A schedule?

It’s generally on the opening day Chris.

Yes, I was just saying that all this really comes down to what we're internally modeling. And he's basically saying we're meeting the expectation of the opening dates in our model. So that's a positive thing.

And those are the numbers, dates that we focus on twice a month in our meetings. That is what we determined the opening date. And that's why our team, we've got a great team, we'll do whatever it takes, we'll source whatever they need to make it happen. That's our job. And that's why we've got so much focused on it.

Okay. Thank you, guys. Really appreciate it.

Thanks.

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

Hi, good morning. Question on Kohl’s was like a top 20 tenant for you. It was seven stores. Looks like they may be acquired by two mall owners. I'm curious what you think about that as a potential issue if they even move the stores out or otherwise be tough negotiators with rent increases or overtime?

Well, let's just start with saying no, we don't know anything that anybody else doesn't know. So Kohl is a great customer. And we certainly wouldn't see any problems with that. It's not a huge tenant for us, but it's an important customer. And I think if something happens there, that's great. We always look to work with whoever's running the business, but we'll see what happens.

Got it. Thanks. Maybe just one more on transactions. And seems like this year you've received thinking to match fund buys with dispositions. But I know, after you close a deal, the hope was that you because capital would go down, it could be less requires. It's curious what your view was on portfolio deals and maybe just being a bit more aggressive at some point and building up the portfolio over time.

Yes, currently, the market is quite competitive, and there is still a significant amount of capital pursuing high-quality open-air retail, which is a limited supply. That's why we were very enthusiastic about the two acquisitions we made. We shouldn't have much difficulty matching funding at attractive spreads. However, regarding portfolios versus individual assets, I haven't observed any significant differences at this time. Whenever there's a high-quality retail deal available, or even if it’s not listed, there tends to be more capital available than products. This imbalance continues to influence the cap rates we're experiencing, which are generally in the high fours to mid-fives. I understand that there are expectations for change and that interest rates are fluctuating, but most of the transactions we are engaged in, as well as those we are considering selling, are primarily cash deals. Therefore, our focus is more on an unlevered IRR approach at this moment.

Got it. Maybe one more question: when do you think supply will start to be less of an issue and something we need to keep an eye on? I know most of the centers still have some occupancy to build up, which can prevent any issues for now. I'm curious about your long-term outlook for supplies, especially considering the Trump Elementals and other factors. At some point, developers will begin to build, so what are your thoughts on that?

Yes, I mean, I think, first of all, it's not quite difficult to build this product. Because you're talking about multi-tenant retail, that's much more complex than it is to say put up an industrial box, for example. So and generally in retail people don't build the stuff that we own speculatively, there's a lot of pre-leasing that goes into it. There's finding the right land. So I just think it's more difficult to do that people think. And from a return perspective, you really got to underwrite the risk associated with ground up development. So, I think for the near term, it continues to be moderated with not a lot of new construction in the high-end arena that we own. And then when you look at the geography of the real estate, and the fact that our real estate is so strong. Again, it's just hard to find properties that you can build on without just spending way too much money, right? So feels like a pretty good balance right now for the next several years.

Tough cost environment.

That's true. Thank you.

Thank you.

Thank you. Your next question comes from the line of Wes Golladay from Baird. Your question, please.

Hey, guys. With the comment that supply is tightening and it sounds like the demand is very good at the moment. When does this dynamic translate into a big acceleration of rent growth?

I think we just had one this quarter. So, I mean, 16% blended cash rent spread, that's what I meant when I said, I think that's pretty darn good. And then 12% spreads on non-option renewals, is also very strong, Wes. So boy, I mean, where does it go from here? Hard to say and again, we don't get caught up in any one quarter too much. But certainly, certainly the environment still feels very good. And I think we can continue to move the needle and again, like I said, Wes, when you look at the total occupancy cost for these retailers, our open cost effective. So that helps us as well. So feels like a pretty good place.

Yes. I guess what I'm trying to get at it seems like the market is still absorbing supply and you're still getting the leases off, they can maybe more like a hockey stick growth like growth that we haven't seen since maybe the early 2000s, you think that dynamic is in play?

Yes. I mean, if we continue with the volume of leasing that we're doing, then that dynamic will come into play. When we leased a million square feet this quarter, and Q2 is stacking up pretty nicely. If we can continue to push those kind of lease, that kind of lease momentum, then yes, you start to get to that point where we talked about you're highly leased, and the marginal lease is going to be at a very good, attractive rate. But also, as we pointed out we're able now to lease in spaces that were kind of persistently vacant probably because of physical issues at a particular property, like an elbow space or something, that we're now able to lease those spaces. So that drives that incremental cash flow that we're so focused on. So I think it's both of those things.

Yes, it seems that there will be a new high watermark for occupancy. When we examine the individual markets you are in, does any particular market appear to be approaching that potential turning point more quickly?

When we look at the deals, for example, in this quarter, when we look at the spread of deals that we did in the quarter, it was very well spread out throughout the country, really each region that we're in produced good results. So fortunately, again, because we have this really strong portfolio, it feels like each segment is performing quite well. So, I don't particularly see one beating the other right now.

Got it. Thanks for taking the questions.

Thank you.

Thank you. Your next question comes from the line of Linda Tsai from Jefferies. Your question, please.

Hi, good morning. In terms of purchasing adjacencies to your existing properties like you did with your Dallas center. Do you track how many of these opportunities potentially exist in your portfolio? And then what's the best way to think about the scalar margin new chief when you find these adjacencies?

We definitely have a list of deals that we're interested in, and we've pursued a few in the past six months. A recent unique deal involved acquiring a center that originally wasn't grocery-anchored. We didn't own the Sprouts or Total Wine locations at first, but now we do. This change not only brought in Sprouts but also Total Wine, which is projected to generate significant revenue. The positive impact we see leads to a substantial reduction in cap rates, potentially by 100 basis points or more. We assess the value from both a terminal perspective and internal rate of return. For instance, in Indianapolis, we acquired two Shockpad buildings that weren’t part of the center initially, which enhances our leasing opportunities across the portfolio. This approach reduces competition and generally provides a better risk-adjusted return on capital, as we already have extensive knowledge about the property. We are keen to pursue such opportunities whenever they arise.

Thanks for that. And then back to the earlier exchange you had with Alex, when your open-air peers discussed, occupancy costs changing since ecommerce has a halo effect to the physical store and it's helping retention rates. How do you think landlords are trying to better understand the real sales productivity of a physical store in the omni-channel environment so landlords can better capture the generated value?

Well, there's two things there. One is in the case that if you can receive percentage rent, you're extremely focused on it. And two is just to understand the performance of the retailer as it relates to our ability to continue to price the space appropriately. So it is a big deal. It's hard to get to the bottom of right now. I think over time, it'll become more and more natural. I think it's clearly a big part of a retailer success today is their ability to tap into the omni-channel that they all have tapped into. But they also need us for that. They need us to be providing the right real estate where that works where it's attractive enough for people to utilize the store in that distribution format. And we're fortunate that we have that, right? So I think stay tuned, because I think it becomes more and more part of what we're doing. But right now, we're just happy that the retailers are performing so well. And they're driving more and more traffic.

Great, thank you.

Thank you.

Thank you. Your next question comes from the line of Craig Schmidt from Bank of America. Your question, please.

Yes, thanks. I just know with April pretty much in the books and ICSC happening next month. I just wonder if the above-average leasing activity will continue into the second quarter mean, how will you do relative to that 1.1 million you just did?

I'm not exactly sure how we're going to proceed since it hasn't happened yet. However, I believe we're off to a strong start, Craig. ICSC presents a great opportunity to engage with many people in a short amount of time, and that's just an added benefit. We're consistently fostering these relationships and discussions. It feels like there's a reason we use the term tailwind. We're extremely busy and active, and there's no reason to think we can't maintain that leasing momentum. Tom, would you like to add anything?

Yes. I mean, Craig we track every day through our sales force format, exactly how many deals are through real estate committee, and more importantly in lease draft. So I will tell you, we feel very, very good about that number in comparison to where we are today. So we're expecting a very strong finish to the second quarter.

Great, and thanks. I noticed you recently leased a Top Shelf. Is this a more attractive option compared to Dollar General for your center's merchandise mix, given its more suburban focus?

It really depends on the specific property. We believe Top Shelf is a great concept; it's modern, clean, and efficient in a small space. We don't have many traditional Dollar Generals. While we do have some Dollar Trees, I don't think we currently have any Dollar Generals. Our portfolio aligns better with a Top Shelf deal. This is just another example of how we have various names, and Top Shelf is successfully making deals with strong credit. We feel we have a great balance right now, and the merger has positioned us perfectly in the right space at the right time for the types of products we offer.

But it's a significant variance to Dollar Tree, Dollar General stores, they are impressive. And I encourage you to take a look at them.

Well, my understanding is the demographic is younger, wealthier, and more suburban, which would seem like I mean, I think the reason you don't have any Dollar Generals, it's a lower customer, it's more rural. I saw it’s curious if this was an opportunity for you. I mean, I guess 9000 square feet, not quite an anchor space, but an opportunity for you to fill up some of that vacancy.

It is absolutely an opportunity and we will absolutely lean into it.

Okay, thanks a lot.

Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Kite for any further remarks.

Well, I just want to take the opportunity to thank everybody for joining us today. And again, I want to thank our KRG team and family who produced fabulous results. And we will continue to push and we look forward to talking to everyone soon. Thank you.

Thank you. Ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.