Good day, and thank you for standing by. Welcome to the Kite Realty Group Trust First Quarter 2023 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bryan McCarthy. Please go ahead.

Thank you, and good afternoon, 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, Tyler Henshaw. I will now turn the call over to John.

Thanks, Bryan, and good morning, everyone. KRG's strategy for 2023 is a straightforward plan anchored in our best-in-class platform. We intend to lease space at attractive risk-adjusted returns, operate our high-quality portfolio at sector-leading margins, and maintain a rock-solid balance sheet. This plan focuses on our key strengths with the ultimate goal of delivering sustainable value for all stakeholders. I'm pleased to report that KRG's first-quarter results exceed our 2023 plan, and our streak of outperformance continues. We generated FFO per share of $0.51, beating consensus estimates by $0.04 per share and representing an 11% increase over the comparable period last year. Our same-property NOI growth for the quarter was 6.5% as compared to the same period in 2022. Heath will provide more details around the components of each metric. KRG signed 144 leases, representing over 830,000 square feet and producing 13% blended cash spreads on comparable new and renewal leases. Excluding the impact of option renewals, our blended cash spreads on comparable leases were 21%. More importantly, KRG earned a 42% return on capital for comparable new leases, which translates into an average payback period of only 2.4 years. The retention ratio in the quarter was nearly 90%, which is well above historical norms. Based on our ability to drive pricing, produce strong returns, and retain existing tenants, it should come as no surprise that we are experiencing strong demand for our Bed Bath & Beyond boxes. Our current guidance assumes that we will recapture all of our Bed Bath locations and that we will not be paid any rent beyond what we have already collected to date. Open-air retail will always be Darwinian, and tenants that are slow to adapt will be nudged aside by more agile competitors. It's what makes our business so dynamic and interesting. We've been through this exercise before. As it relates to Bed Bath or any struggling tenant, we'll gladly trade any temporary disruption for the long-term value creation associated with re-letting these spaces to vibrant and traffic-generating tenants. The good news is that Bed Bath boxes are attractively sized and located in prime spots within our centers, which we expect will translate into healthy re-leasing spreads and strong returns on capital. Currently, we have significant interest in our locations from a variety of categories, including specialty grocery, discount, sporting goods, and home furnishings. We have persistently maintained that leasing existing space offers the best risk-adjusted use of our capital, and we're poised to swiftly address the backfill potential for these boxes. The past two and a half years serve as a great example. We've executed 58 anchors, representing over 1.4 million square feet at 18% comparable cash-leasing spreads and 20% returns on capital. You've often heard us say that the only permanency in our business is the underlying land. Everything on top of it can change. When asked which open-air format we are most likely to invest in, our answer is always, we invest in great real estate. We're starting to see the same philosophy implemented by our retailers. Retailers are focused less on the type of center and more on the underlying quality of the real estate. This growing trend is supported not only by the increasing body of data available to our tenants but also by the post-COVID realization that brick-and-mortar stores are the primary distribution point along a supply chain that requires convenience, speed, and healthy profit margins. As a result, we focus on the underlying quality of the real estate across a variety of product types. Our portfolio is well balanced among the open-air retail categories, thereby offering a wide array of options to our retailers. Furthermore, our product is pliable enough to be reconfigured if the real estate dictates a different use. These trends, together with the lack of meaningful new supply in the open-air retail space, have created an extremely favorable supply-demand dynamic for KRG. The culmination of all these great things I've just mentioned is allowing KRG to increase its NAREIT FFO guidance by $0.03 per share, moving the midpoint from $1.92 to $1.95. We're also increasing the midpoint of our same-property NOI growth assumption by 25 basis points, moving the midpoint from 2.5% to 2.75%. I'll now turn the call over to Heath to provide additional details.

Good afternoon, and thank you for joining us today. I'm pleased to report that KRG has kicked off 2023 with another quarter of outperformance. For the first quarter, KRG generated $0.51 of NAREIT FFO per share, which was 11% higher than the comparable period in 2022. This year-over-year increase was primarily driven by higher same-property NOI, which grew by 6.5% in the first quarter. Increased occupancy was the primary driver of our same-property NOI growth with a 440 basis points increase in minimum rent, a 120 basis points increase in net recoveries, and a 90 basis points increase in overage rent. As John alluded to earlier, we are raising our NAREIT FFO guidance to $1.92 to $1.98 per share, representing a $0.03 increase at the midpoint. $0.01 is attributable to the 25 basis points increase in the same-property NOI growth assumption due to lower-than-anticipated bad debt and higher-than-anticipated overage rent and tenant retention. Another $0.01 is attributable to a short-term lease we entered into with the legal theaters for the location in the Los Angeles MSA. The final $0.01 is a result of higher non-cash items related to a reversal of certain below-market lease intangibles. Our revised full-year guidance range relies on the following additional assumptions at the midpoint; same-property NOI growth of 2.75%; neutral transaction activity, full-year bad debt of 115 basis points of revenues; and an additional 75 basis points reserve specific to Party City and Bed Bath & Beyond. It appears that Party City will emerge from bankruptcy in the near-term, and we will not be losing any locations. Our assumption is that Bed Bath is in liquidation mode and that we will not collect any additional rent going forward. It's important to note that of the total 75 basis points of potential disruption, only five basis points was experienced in the first quarter as Bed Bath continued paying rent on the vast majority of its locations. For this reason and others, we caution against annualizing our first-quarter results. Specifically, the first quarter benefited from items that are not budgeted to repeat themselves during 2023. As it relates to the same-property NOI, for the balance of the year, we are assuming no additional rent from Bed Bath and elevated bad debt run rate in a lower overage rent. Consistent with the last quarter, and based on comparable 2022 periods, we anticipated very strong first quarter same-property NOI growth that moderates over the course of the year. Outside of the same-property NOI, the first quarter benefited from lower interest expense related to retired mortgage debt and the previously referenced non-cash contribution. As we demonstrated last year, it's early and a lot can happen between now and the end of 2023. We are extremely confident with respect to the things we can control. Prudence dictates that we remain conservative with respect to the things that we cannot control. On the balance sheet front, we retired $162 million of mortgages using our revolving line of credit and cash on hand. Over 96% of our NOI is now unencumbered. Subsequent to the end of the first quarter, we closed a $93 million mortgage at KRG share, secured by our One Loudoun Residential joint venture project at a fixed interest rate of 5.36%. KRG is a 90% owner of the 378 multifamily units at One Loudoun, which are currently 96% leased and continue to outperform our initial underwriting. The proceeds of the mortgage were used to pay down our $1.1 billion revolving line of credit, which currently has a balance of $68.5 million. We are a battle-tested management team that has navigated a variety of challenging cycles, but never with a balance sheet of this caliber: net debt-to-EBITDA of 5.3 times; debt service coverage ratio of 5.2 times; over $1 billion in liquidity; minimal floating-rate debt; a well-staggered maturity schedule; deep banking relationships; a huge unencumbered asset pool; and multiple capital sources. These formidable attributes inspire a calm confidence across the entire organization and allow us to remain intently focused on operational excellence. Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from Craig Mailman from Citi. Your line is now open.

Hey, guys. I just want to clarify, so Heath, you said Bed Bath was current in 1Q, but you guys are assuming zero rent for the balance of the year. Did they reject all the leases in that first motion, or have they paid anything in April? Just kind of curious why you're assuming nothing from end of first quarter during the balance of the year?

Yes, Craig. So we've had a total of four locations that have been rejected to date. And they did pay a handful of locations for April rent. But just as a matter of conservatism, we're just assuming that from this point on, we're not going to see any rent. I mean in reality, they did get a $240 million dip. So we're likely to see some form of rent in terms of a post-petition. But again, for the purposes of our guidance, we just assume that we're not going to see another dollar from this point forward.

Okay. And then could you just give some sense of where you guys are in the backfill process? How many of you guys have gotten back? And where you are in kind of the process?

Sure, I can share some insights, and Tom can add to it. Essentially, we are in the same position as others in the market. Retailers are keen to lease these spaces. Our current goal is to make sound decisions regarding which retailers to select. To be honest, we are concentrating less on the speed of the process and more on the quality of the tenants we choose. One unique aspect of Bed Bath is that it was once a top tenant in the industry. Out of our 22 locations, 19 are fully leased to anchors. This presents a great opportunity for a strong tenant to occupy this space. Additionally, one location is a ground lease, and two others include both Bed Bath and Buy Buy Baby. My overall approach is to be deliberate, make wise capital decisions, and involve excellent retailers. We are actively engaged in discussions for all our spaces. Tom, do you want to add anything?

Yes. One of the key factors is the current lack of supply, which we are leveraging to our advantage. Our company is well-prepared for this situation. Our development and construction teams are reviewing plans and understanding rooftop units, panels, and so on, enabling us to advance through the estimating and construction phases as swiftly as possible. As John mentioned, this presents a significant opportunity. It’s about securing the right tenants for the long term and achieving strong returns on investments.

I understand that you don’t have complete visibility, but if you consider that all tenants will not be paying rent moving forward, what do you estimate the timing will be for backfill, based on the demand you currently see?

Sure. I think it's not that different from what it usually is, Craig. These anchor deals, generally speaking, when we actually regain possession, we should remember that some of these leases might get bought. There are factors outside of our control. If a lease is bought, the rent starts very quickly. So we're being very conservative in our guidance. Assuming we take the space back, it usually takes about 12 to 18 months. That has always been the case with anchor leasing. As Tom mentioned, we're not focused on a specific timeline; we're focused on creating value. Therefore, I can't specify the number of deals we have in lease negotiations or letters of intent; that's not important. What truly matters is that we have a unique opportunity to bring in tenants that will significantly impact the property. We have multiple interested parties for various spaces. Overall, things probably haven't changed, and we're still operating within the normal timelines, which will depend on whether we are building out a space or if someone has bought the lease and is simply starting to pay rent.

Great. Thank you.

Thank you.

Thank you. One moment, as I prepare the next question. Our next question comes from Todd Thomas of KeyBanc. Your line is now open.

Hi, thanks. Good afternoon. I guess just following up on that line of questioning. You did very well with the Stein Mart vacancy and backfills over the last couple of years now. Can you talk about the spreads that you anticipate on Bed Bath backfills? And John, you just characterized it as sort of a once-in-a-lifetime opportunity. Does that mean that there will be some balance between sort of rents and rent growth and maybe credit quality as you move forward? And also, can you talk about the outcome abating between single-tenant backfills versus box splits within the 22 locations you have?

Yes, Todd. I believe our current experience is quite similar to what we've seen over the past couple of years. As mentioned earlier, over the last 2.5 years, we completed 58 anchor deals, with 18% rent spreads and a 20% return on capital. It’s important to recognize that this isn’t a simplistic approach; we need to balance both aspects. While we aim for a healthy spread, our primary focus is ensuring that the capital we invest in these deals generates a significant return along with maintaining good credit quality. All these factors need to work together. We have already stated that we expect rent spreads to be in the range of 15% to 20%. More importantly, we want to continue achieving strong double-digit returns on capital. I see no reason why we shouldn't be able to do this. If this situation is going to unfold, now is an excellent time for it to happen, particularly given the current state of open-air retail.

And then, Todd, just a couple of other things. One is diversification. We've been talking about diversification quite a bit in making sure that our reach throughout the tenant universe is very strong, instead of just taking the first inbound calls. So that's a priority. Then you also asked about the probability of potential splits. I mean, one way to look at it is we did 58 box deals in the last two and a half years and split only one of those. Now, that's a pretty remarkable ratio. There's a possibility that we have splits, but looking at really our prospect list and where we are in the process of all these deals, I think we're going to see a very positive ratio once again in terms of avoiding splits.

In addition, we may consider a split to benefit the center. There may be an opportunity to bring in a smaller specialty grocer and pair them with another entity. If we believe this is the right move for the center, we'll proceed with it. I trust that we have the leverage to make these decisions due to the supply and demand dynamics I've mentioned. Most of the deals will likely be with individual users, but there may be a few instances where we prefer to split the space.

Okay. And then, in terms of investments, do you see opportunities beginning to surface from maybe private owners with Bed Bath space? Maybe some other vacancy that might not have the capital to reinvest in their centers, or is that not likely to result in much deal flow? And how big is your appetite here to find new investment opportunities?

Well, I think the investment market is pretty volatile right now. Obviously, there's disruption in the capital markets. So I would say that right now, you're probably not going to see a lot of that. I still kind of believe that perhaps in the second half or maybe even more towards the fourth quarter of this year, there would be more opportunities. But again, we're going to be very selective. We have a very, very strong portfolio, and we want to continue to own the best real estate. I made mention of the fact that when we make investments, we make investments in the land. That is permanent. And we think we're pretty good at making real estate decisions. So, probably, Todd, some opportunities will arise. But right now, it's a little slow on that front, just obviously with the disruption in the market.

Okay. And, Heath, real quick on the guidance. The $0.02 that were included in the revision, so $0.01 related to the theater negotiation, $0.01 of non-cash rent. Were both of those fully realized in the first quarter, or was that partially recognized in the first quarter and something that's going to continue in the run rate throughout the balance of the year?

Yes, the non-cash event was realized in the first quarter, Todd. You may notice some additional non-cash items related to the Bed Bath closures as they occur. The Regal rent will be recognized gradually over the year since they are only paying on a short-term agreement.

Okay. And that deal, the short-term deal is expected to end at/or prior to the end of 2023, or is there additional term?

It will actually terminate in January of 2025. And then they would have an option to go back to their standard deal, but we set it up to give us optionality, both on that situation as well as potentially maximizing the value of the land.

Okay. All right. Thank you.

Thanks.

One moment please. Our next question comes from Floris Van Dijkum from Compass Point. Your line is now open.

Great. Hey guys. Thanks for taking my question.

Good morning.

Hey. I wanted to discuss your small shop occupancy, which has increased to 98.8%. What was your peak occupancy? Additionally, could you share your expectations for the next couple of years regarding this area, including potential growth? I've noticed that your small shop rents are typically much higher than your anchor rents, and it seems you may be receiving more in small shop rents currently. However, your fixed rent increases for small shops should be higher. Could you elaborate on these aspects of your portfolio?

Hey, Floris, just to clarify, for the small shops, the lease percentage is just a little over 89%, I believe it's 89.5%. So, I think you might have those numbers reversed.

89.8%?

Certainly. Here’s the rewritten Earnings Call remark: Yes, so I will have Tom elaborate on it. If you examine our recent quarter, we completed 144 comparable deals, with the majority being small shop deals—121 of them were shop deals. The shop business is very active, and I’ll have Tom provide more details.

So to get to your point, the high-level mark for shops was 92.5%. So right now, we're at 89.8%. So there's about a 270 basis point spread there. So there's no question. We know that we can get back to that number. It will take time. But the bottom line is there's a tremendous amount of growth ahead of us. And we did fall back 20 basis points. And that was really kind of more of a seasonal scenario, but we expect to pursue that growth and continue on our path that we have, particularly through all of 2022. So one other point you mentioned, Floris, is that the spreads are better. And John mentioned, there's no question that, that should buoy growth as well as we work through that spread differential of 270 basis points.

The other important part there, Floris, and I've said this a lot. But on the shop side, obviously, the rent commencement is much quicker than it would be on the box side. So to the extent that we continue our pattern of leasing, then that can help buffer some of the NOI loss, assuming the Bed Bath situation is the way we project it.

And one more thing, Floris, that 92.5%, that was something we achieved at the end of 2019. It's important to note, we didn't view that as a ceiling. So yes, that was at 92.5%. That was the highest in the company's history, but we were planning on growing that in 2019 and beyond.

And is it correct to assume that your fixed rent bumps on your shop space are somewhere in the neighborhood of 250 basis points on average versus your anchor space probably closer to like 100 basis points?

Well, it's correct to assume that generally in that range, but we are extremely focused on that particular part of our business right now, Floris. And we're actually, I think, probably maybe more focused on it than most, because it's very important that we take this opportunity in this point in time in the cycle to generate higher annual bumps than 250. So, I think that this is one of the primary legs that we're focused on this year, and we're doing quite well. And each deal that we do now, it's a major point of discussion. And I think the retailers understand and the environment that we're in especially when it relates to supply-demand characteristics, they're going to have to pay more than 2.5% a year on the small shop side.

So would it be fair to say that new leases are done around 300 basis points and Fixed CAM is probably 4%, somewhere in that range?

You've got to make your own assumptions on that, Floris, but I can't give you exact right now.

Got it. Okay. Let me ask about the Regal lease. I know they're paying rents, but obviously, it's been suggested that the land could be more valuable for uses other than a theater. Where do you stand in your negotiations with the authorities regarding rezoning for apartments or industrial use? I would assume that apartments are viewed more favorably by the local government. Can you provide an update on that and what the pricing is for apartment land in that area?

Floris, from a timing standpoint, our team has been out there two to three times already meeting with Ontario. And the positives is that from a comp plan perspective, they very much would like to see this property redeveloped. So I think we're working with a group that understands this is a great opportunity not only for this piece of land but for the community as a whole. So the apartment land appears to be the best approach, but we're keeping our eyes open and will likely take looks at various suitors for the property as well as assess it ourselves. So we're in the site planning phase with staff right now, and we are moving nicely. And that's why this deal out to 2025 was really a perfect scenario for Kite. That gives us the opportunity to get these things accomplished within that timeframe.

Great. Thanks, guys.

Thanks, Floris.

Thank you. One moment for our next question. Our next question comes from Alex Goldfarb of Piper Sandler. Your line is now open.

Okay. Good morning, out there – sorry, good morning. Just great earnings.

Good morning.

Thanks, John. I have a couple of questions. First, regarding property insurance, which has been a popular topic for apartments this season. You have significant sub-belt exposure. What increases are you observing in property insurance? I'm particularly interested in how this might affect your tenants, especially the smaller mom-and-pop businesses. Can they all handle the rise in premiums that we're hearing about?

Hi Alex, it's Heath. The good news is that this is a recoverable issue. However, premiums have gone up. Our renewal date is December 1, and we experienced this last year. Given the previous hurricane season, especially in Florida, we've encountered significant increases in property insurance. The positive aspect is that we have a captive insurance program, which allowed us to creatively manage and diversify our risk to mitigate the increase for the tenants. It is indeed a real concern that we actively address. We invest considerable time with our insurance providers, traveling and meeting with them just as we do with investors to assure them about Kite's stability. A significant factor for them this year was our experience with a Category 4 hurricane that hit Naples, resulting in the total loss of one of our properties. Each situation is very site-specific. There were increases this year, but we hope to see some easing in the market for our next renewal in December.

Hey Alex, I want to quickly mention that I believe this is one of our strengths. In our open-air platform, the total cost to operate is very affordable when considering CAM, taxes, and insurance. This is largely due to the simplicity of the buildings. I think it offers an even better perspective for retailers as they become more selective about uses. When they evaluate our real estate, they notice that the operating costs are significantly lower than what they might find elsewhere. This is another advantage that is currently working in our favor.

So, what you're saying, John, is you guys haven't seen any impact of smaller tenants who said, hey, I can't stomach that.

No. No. Not at all. Not at all, Alex.

Next question is about Bed Bath. It seems that we won't know for a while how many of these Bed Bath properties are purchased at auction compared to how many the REITs recover. There appears to be a significant rent reduction, around 20% to 30%. Generally, what is the average remaining lease term for the Bed Bath properties? I assume that for tenants eager to be in certain locations, they won't mind if there are only two years left on the lease. They would prefer to secure the space and hope to renew instead of missing out. Can you share your insights on the types of leases that would attract interest at the auction and the average remaining term? I'll let you respond.

I currently don't have that information at hand. However, if I had to estimate, the primary term is likely around five or six years. More importantly, buyers will be acquiring options along with the lease. This is why we highlighted this possibility while maintaining a conservative outlook on our earnings for the remainder of the year. Tenants will definitely consider the remaining term, available options, and the rental market conditions, such as whether the rent is deemed below-market. There's a lot of factors at play here. Additionally, we would have the opportunity to pursue purchasing a lease if we felt it was necessary to maintain control. This is why we framed our guidance this way—keeping it out of the equation for now, and we'll see how things develop.

And then, Alex, I think you'll also see a hybrid of what we're all talking about, and that's a situation where a retailer will contact us directly, which has occurred and say, hey, look, we could go out and purchase these, we would rather enter into a new lease. They, of course, would pursue tenant improvement dollars. So we'll be seeing a lot of different scenarios as this begins to unfold.

Which is another reason that we said, this is not a game about how fast you can get there. It's a game about how good a deal you can do.

Okay. Thank you.

Thanks, Alex.

Thank you. One moment, as I prepare the next question. Our next question comes from Michael Mueller of JPMorgan. Your line is now open.

Yes, Heath, you mentioned a few factors regarding the Bed Bath boxes. Can you clarify what the total revenue was in the first quarter, including recoveries, that we should expect in the second quarter? Additionally, what specific indicators do you look for to initiate future redevelopment opportunities?

I think we're going to answer the second part of that question first, which is what are the actual triggers we're looking for in terms of redevelopment, I'll turn it over to Tom.

So from a redevelopment standpoint, we're going to be looking at quite a few different factors. And we've been doing this a long time, decades and decades. So really, the sky is the limit in terms of the optionality. But that will, of course, be one of the key things that we study as part of this. And once again, we get back to the fact that this takes time, and we're going to make sure that we do it right and end up with the best configurations as we go forward.

And then on the first part of the question, Mike, the answer is it was about $0.01 of FFO, so a little over $2 million, what we collected from Bed Bath in the first quarter, which is why the disruption for the last three quarters is around $0.03.

Mike, it's John. It actually gives me an opportunity to say that if you stop and think about it for a minute, so Bed Bath was our eighth largest tenant, 1.4% of revenue, right? So you're talking about, what is that, a little over $8 million. And we're saying we got paid for one quarter. We're assuming they're out for three quarters. And even with that hit, we just raised guidance a couple of cents over what it was last year, what we did last year. So I think it kind of shows the resiliency of the business right now and the ability to kind of make things up along the way in terms of other leases that are coming online with sign, not open, et cetera. So it's a good opportunity to highlight the strength of the business.

Got it. Thanks for the color. Thank you.

Thank you.

Thank you. One moment, as I prepare the next question. Our next question comes from Anthony Powell of Barclays. Your line is now open.

Hi, good afternoon. Question on small shops and regional banks. Everyone's worried about regional banks today and recently given all the failures. And are you concerned about the ability of small shop tenants to either access credit or to expand maybe not now, but later this year or next year, given kind of the anticipated tightness on the lending standards from regional banks?

I mean I think, obviously, it's hard to know where this goes right now, Anthony. But to date, there has been no indication of any slowdown in business formation and expansion of franchises. Remember, a lot of our small shop deals are national deals with large creditworthy companies. So the actual mom-and-pop piece of it is pretty small. I think it's around 10% maybe of the shops. So we just aren't seeing it. As it relates to regional banks, we'll see how that plays out. I mean, I think there's so much going on right now that to try to draw long-term conclusions is probably foolish. But so far, so good. And look, as we said earlier, we have opportunity in the shops, and we're seeing tremendous volume right now. So we actually feel pretty good about it.

Thanks. One more. Sorry, if I missed this, but what drove the 10 basis points decline in the bad debt assumption guidance? And what are you seeing from tenants in terms of either bad debt or discussions beyond kind of Bed Bath & Beyond and Party City?

Well, Anthony, the 10 basis point decline is really a feature of taking the actual bad debt that we experienced in the first quarter. And I'm assuming the same 125 basis points for the balance of the year. So when those apply together, that puts you at 115 basis points of bad debt on a go-forward basis.

Got it. And have any other retailers popped into the watch list, or just any commentary on tenant health would be great.

No. I mean, I think the list is generally pretty much what it's been for a while, Anthony. We've been talking about Bed Bath and Party City for a long time. These things take a long time to play out. So the current environment is still very healthy for retail. And our centers are very busy, and we made mention of kind of the shifts that have happened post-COVID. All these things that have happened post-COVID have been very, very fundamentally good for open-air retail. And I think there's even more of that to come in the future. So right now, we aren't seeing a tremendous change there. But we also mentioned, it's a Darwinian business. There's going to be retailers that don't innovate enough, and they will be moved aside by the ones that do. And the great thing is we're the landlord. We're not running those businesses. We're running our operating property platform, and we're going to put in the best retailers, and they need to do strong sales or we'll find ones that can.

Great. Thank you.

Thank you.

Thank you. One moment while I prepare the next question. Our next question comes from Lizzie Doykin from Bank of America. Your line is now open.

Hi. Good afternoon. I wanted to ask about the leasing volumes and activity this quarter, which reported 144 leases covering 831 square feet. This seems a bit lower than last quarter, likely due to fewer renewals. I'm curious if you’re experiencing a moderation from previously high demand levels, or if you could describe the recorded activity compared to what you anticipated? Also, what would you consider a more normal level going forward?

Yes. This is Heath. I'll let Tom talk about sort of the type of tenants that we're talking to. The small shop demand is still extremely strong. And you're right, the lower volume is really a function of renewals, and that's really timing. As you noticed, we still have a 90% retention ratio. So just with the way that the renewals are sort of shaking out over the course of the year, they're more back-end loaded. So I wouldn't read too far into the actual square footage volume in terms of what it means for tenant demand. So, Tom, why don't you tell us about who's been talking to us?

Yes. Another aspect is that we completed a significant number of boxes last year and currently have around 20 available, down from a peak of 58. We've reduced that significantly, and this is also related to our lease percentages and being in the right locations. Overall, our focus is on specialty grocery, which is a major factor, as John mentioned. These come in various sizes and layouts. We have been productive in the sports industry and the furniture and home store business, along with a strong presence in the discount sector. The recent deals we've made with tenants like Fresh Market, Total Wine, DICK's, and HomeGoods exemplify the variety we can draw from, and we maintain close relationships with these tenants. These interactions are ongoing, and we feel confident about our tenant pool. The volume may fluctuate, as Heath mentioned, but the key factor is the timing of renewals and the reduction in our box inventory from a previously high level.

Okay. Makes sense. Thanks. And I was wondering if how much of the improvement in your same-store NOI guidance could have been attributed to the better expense growth we saw in 1Q? I'm wondering if that's just an easier cost that we saw year-over-year. Or how much of that the function of the initiatives you've taken to reduce costs or even cost synergies coming from the RPAI merger? Thanks.

The increase in the same-store guidance is primarily due to higher base rent and increased overage. These factors are the main reasons for the rise in same-store performance. Additionally, as our occupancy improves, we are seeing a higher retention ratio than we initially projected. All of these positive high-quality elements are contributing to the increase in the same-store NOI assumption by 25 basis points.

Okay, great. And just to confirm, I guess, on expenses year-to-year, I guess that was almost flat. Is there anything to comment on with regards to specific line items?

No, I don't think there's anything specific in the line items to comment on the expenses.

Okay, great. And just one last one for me. I noticed, I know a recovery on insurance, but touched on a bit earlier. But it looks like the recovery ratio ticked up just a little bit on retail properties, but this still seems low from last quarter. Is that mostly a function of the reserves for Bed Bath & Beyond? And then what might be driving a better expense recovery for the whole portfolio?

I believe occupancy is going to lead to higher expense recovery ratios. Furthermore, we are effectively implementing our new leases, and we are seeing positive results from our fixed CAM initiative. As more tenants sign up for fixed CAM, the recovery ratio will remain very high.

I would also point out that our NOI margin is 74%, while the average for our peer group is in the high 60s. This reflects our strong cost control efforts and steady fixed CAM. As we continue with lease-ups, there's a significant opportunity for our platform to stand out, which we are effectively doing.

Great. Thank you.

Thank you.

Thank you. At this time, I would now like to turn it back to John Kite for closing remarks.

I just want to say thank you for joining us today and look forward to seeing you soon. Bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.