Good day, ladies and gentlemen and thank you for standing by. Welcome to the Third Quarter 2025 Kite Realty Group Trust Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Bryan McCarthy. Sir, please begin.

Thank you and good morning, everyone. Welcome to Kite Realty Group's Third 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 a reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom 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'll now turn the call over to John.

Thanks, Bryan. Good morning, everyone. The KRG team is executing on all fronts, driving occupancy higher, leasing space at strong spreads, embedding higher rent bumps and optimizing the portfolio. Our outperformance underscores the strength of our operating platform and is allowing us to increase the midpoint of our NAREIT and core FFO per share guidance by $0.02 and our same-property NOI assumption by 50 basis points. Our efforts are positioning us for sustained value creation as we close out 2025. Our lease rate increased 60 basis points sequentially, driven by the continued demand for space across the portfolio. We believe the second quarter represented the low watermark in our leased rate. As we've discussed in the past, we view the recent wave of bankruptcy-driven vacancy as a value creation opportunity to embed better growth, upgrade the tenant mix and derisk our cash flow. Through the re-leasing process, we've maintained our focus on establishing the groundwork for higher organic growth that will continue to pay dividends long after the occupancy stabilizes. Over the last 2 years, we've moved our embedded rent bumps to 178 basis points for the portfolio, which is a 20 basis point increase from only 18 months ago. In the third quarter, we executed 7 new anchor leases with tenants, including Whole Foods, Crate & Barrel, Nordstrom Rack, and HomeSense. We've been proactive in diversifying our merchandising mix as 19 of the anchor leases signed year-to-date have included 12 different retail concepts. On the small shop side, we are now within 70 basis points of our previous high watermark of 92.5% and have full confidence in surpassing prior levels. Activity this quarter included leases with CAVA, Kitchen Social, Fit Peak, Rockies, and Free People. Our team's focus on curating a dynamic merchandising mix and driving traffic to our centers continues to elevate the portfolio. We're making meaningful progress on the transactional front, highlighted by the recent sale of Humblewood, a center anchored by Michaels and DSW. This transaction reflects our ongoing commitment to driving organic growth and derisking the portfolio by recycling capital out of noncore large-format assets. Our disposition pipeline totals approximately $500 million across various stages of execution. We aim to complete the majority of these transactions by the end of the year. While there can be no assurances that all sales will close, our capital allocation discipline remains unchanged. Depending on the timing and mix of the assets ultimately sold, we intend to deploy the proceeds into some combination of 1031 acquisitions, debt reduction, share repurchases, and/or special dividends. In all instances, our objective will be to minimize any earnings dilution and maintain our leverage within our long-term range of low to mid-5x net debt to EBITDA. Since our last earnings release, we have repurchased 3.4 million shares at an average price of $22.35 for approximately $75 million. The midpoint of our updated core FFO per share guidance implies a 9.2% FFO yield and a 23% discount to our current consensus NAV on this activity, representing compelling arbitrage to recycle capital out of our lower growth assets into our own shares. Roughly half the funds for these buybacks were sourced from completed asset sales, including Humblewood and an outparcel disposition, with the remainder to be funded from future asset sales. Our third quarter performance reinforces the growing strength of our platform and the powerful tenant demand fueling our business. We're energized by the opportunities ahead to generate durable long-term growth. And as we finish the year, we will remain disciplined, leasing space that delivers strong returns, redeploying capital out of lower growth assets, and elevating the overall quality of the portfolio. With a focused strategy and a deeply committed team, we are well-positioned to deliver sustained value for all of our stakeholders. I'll now turn the call to Heath.

Thank you and good morning. Our third quarter results reflect the collective strength and focus of the entire KRG organization. We've built meaningful momentum, driven by compelling tenant demand, disciplined execution and a team that continues to deliver across every metric. As we turn toward year-end, our goal is simple: finish 2025 strong and carry that same drive and conviction into 2026, where we see tremendous opportunity to further elevate our platform. Turning to our results, KRG earned $0.53 of NAREIT FFO per share and $0.52 of core FFO per share. Both metrics benefited from a $0.03 contribution associated with the sale of an outlot to an apartment developer. As mentioned on our prior earnings call, this transaction was embedded in our original 2025 guidance and represents a strong example of unlocking value from an underutilized portion of one of our centers. Same-property NOI increased 2.1% year-over-year, driven primarily by a 2.6% increase in minimum rent. We recognized $39 million of impairments this quarter, $17 million at City Center and $22 million across the Carillon land and Carillon MOB. City Center is being remarketed and we're close to awarding the deal. The Carillon assets are under contract with different buyers, which shortened our hold period. Collectively, these charges reflect the gap between our carrying values and their respective estimated sale prices. As John mentioned, we are raising the midpoints of our 2025 NAREIT and core FFO per share guidance by $0.02 each. $0.01 of the increase reflects outperformance in same-property NOI, while the other $0.01 is driven by capital allocation activity, namely our recent stock repurchases. We're also increasing the midpoint of our same-property NOI growth assumption by 50 basis points. The outperformance in same-property NOI is primarily attributable to earlier-than-expected rent commencements and stronger specialty leasing income in the back half of 2025. Our general bad debt assumption remains unchanged at 95 basis points of total revenues, representing the blend of actual bad debt experienced year-to-date and a continuing 100 basis point reserve of total fourth quarter revenues. It's important to note that for our full year 2025 guidance contemplates the completion of approximately $500 million of noncore asset sales in the latter part of the fourth quarter. Conversely, our guidance does not assume any deployment of the related proceeds. Given the anticipated timing of these transactions, any earnings impact from either the potential sales or potential redeployment of proceeds would be negligible in 2025. We've consistently emphasized that the strength of our balance sheet provides us with tremendous flexibility in how we allocate capital. The recent share repurchase activity and the potential sale transactions that John mentioned are clear examples of that flexibility in action. Our balance sheet remains one of the strongest in the sector, giving us the capacity to pursue opportunities that enhance shareholder value while maintaining our financial discipline. We remain firmly committed to our long-term leverage target of low to mid-5x net debt-to-EBITDA which continues to position us well for both stability and growth. Lastly, our Board of Trustees has authorized an increase in our dividend to $0.29 per share, which represents a 7.4% increase year-over-year. For many of our long-term investors, the dividend is a critical aspect of REIT investing and we believe KRG's dividend is an extremely attractive risk-adjusted yield. Earlier in the year, we mentioned the possibility of a special dividend to occur in 2025. We still anticipate distributing a special dividend of up to $45 million but the size will ultimately be determined by our fourth quarter taxable income and the outcome and timing of our current disposition pipeline. Thank you to our team for their relentless efforts to deliver strong results and create long-term value for all stakeholders. We look forward to seeing many of you over the next several weeks on the conference circuit. Operator, this concludes our prepared remarks. Please open the line for questions.

Our first question or comment comes from the line of Cooper Clark from Wells Fargo.

Hoping you could expand more on your earlier comments on the dispositions. Is it fair to assume that most of the volume is power centers, given your comments on previous calls? Also curious on cap rates and then benefits to the same-store growth profile and underlying tenant credit moving forward.

Sure. Cooper, yes, I think it's fair to say that this is in line with the messaging that we've had in the past, which is that we're looking to shrink that middle part of our portfolio, which would be those larger format centers and power centers. So yes, I think that's kind of the direction that we're heading and that is what this particular group of assets is. In terms of pricing, we haven't released that in the past and we've got to get to the closing. But suffice to say, the activity should be well inside of what our implied cap rate is right now, which is what's happened historically.

Does it work for you, Cooper? Cooper, this is Heath. I would also say on the same-store, listen, on a net-net basis, the entire pool would be accretive to same-store but it all depends on which mix of assets we end up closing. So TBD on what it does to the 2025 same-store.

Our next question or comment comes from the line of Andrew Reale from Bank of America.

I'm curious if you could provide more details about the current occupancy levels and the exposure to watch list retailers within the assets that are in the pipeline. Additionally, how much more volume beyond the $500 million might you consider selling?

Well, let me just start by saying that the occupancy is likely going to reflect the occupancy in the portfolio, and these are stabilized properties. You should keep in mind that since we're discussing the middle part of the larger format centers, there is exposure to watch list tenants. This is going to be a factor for any of those types of assets if they're larger format power centers. I'm sorry, what was the second part of that question?

Just how much more volume beyond $500 million could you potentially look to sell?

Yes. Right now, I think we're very focused on just getting this closed. We anticipate that a lot of this will happen by year-end, so we're quite busy on getting that done. After that, we'll move forward. We aim to improve the portfolio and work significantly on the embedded rent growth. The fact that we've increased our embedded rents by 20 basis points in 18 months is impressive. We're already approaching the higher end of the peer group regarding embedded growth. Our main focus is to reposition the portfolio to create a better growth profile for the coming years. Much of the growth seen in this sector since COVID has been a recovery in occupancy, and we're looking to generate growth without relying on that. We'll see how this develops, but we're optimistic about it.

Okay. That's helpful. And then if I could just ask a follow-up. As we start to really model out '26, could you just go back and remind us of what the one-time items are that have impacted this year and kind of what those are worth on a per share basis?

Yes. Today, it's around $17 million from what we refer to as recurring but unpredictable items, which include a mix of term fees and gains from land sales.

Our next question or comment comes from the line of Todd Thomas from KeyBanc Capital Markets.

I just wanted to ask about the guidance revision and maybe sort of an early look around '26. The revision this quarter, there was a $0.01 positive contribution from capital allocation activity. Heath, you said that's almost entirely due to stock buybacks, just given the timing of the transactions that you're talking about in the redeployment. But any considerations around 2026, I guess, vis-a-vis your comments around transacting in a manner that minimizes dilution, how we should maybe think about how all of this sort of plays out?

Yes. Todd, I think it's too early. In February, we're going to have a lot more visibility into what we actually do with the proceeds. As John said in his remarks, we have a menu of items. Obviously, one of the attractive ones now is the redeployment of capital into our share price based on where the implied yield is versus the implied yield of these assets that we're selling. So again, it's really going to depend on, are we going to close these things, what do we do with the proceeds? So we'll have much more visibility in February. So thank you for your patience and we'll talk to you then about '26.

Yes. Only thing I would add to that, Todd, is you just got to remember that there's complexity in terms of the taxability associated with the sale, the gain or the loss. So I think we have to let that develop and focus on getting this current batch closed. And then as Heath said, we'll be in a much better position. But the real positive here is that there's a lot of opportunity for us to improve the portfolio, improve the growth and there's a real demand for the type of product that we're looking to sell. And again, with the discount to NAV and the implied cap rate where we're at, this has been quite a good time to be doing this.

Okay. Is the $500 million figure you mentioned meant to represent gross sales? Or are you considering a joint venture where you might keep an interest in these assets? Also, can you prioritize the redeployment opportunities you talked about, such as acquisitions and share buybacks, and share your thoughts on that today?

For the first part of your question, the pool we are discussing, which is about $500 million, consists entirely of sales and does not include any joint venture contributions. When prioritizing the various options, it ultimately depends on timing, the specific assets, and their tax implications, which will influence our initial decision. Our goal remains to invest in opportunities that are either accretive or only slightly dilutive to the overall balance sheet. We will have to evaluate how this progresses. Given the yields we are able to achieve through sales and reinvestment, our focus is on the strong demand for the properties we are selling. As we've mentioned multiple times, reinvesting in our stock was a straightforward choice. However, as we move forward, the situation will become more complicated due to tax considerations and other factors.

Our next question or comment comes from the line of Craig Mailman from Citi.

I would like to inquire about the City Center, which has been impaired. You mentioned that this is one of the assets being recycled as part of the Legacy West transaction. Does the additional write-down affect the accretion calculations you provided for that deal? Also, where should we expect the cap rate for that transaction? Is it above 10%, similar to the Carillon MOB and the development land? It appears that these prices are falling short of your initial expectations. Can you elaborate on the current yield levels?

Sure. First part of your question, no, it is not going to impact the yields. I mean, this is a fairly de minimis impact on yields as regards to Legacy West. And if you remember, we kind of gave a range of what that sale might be. So this would be de minimis. And it's really a result of kind of pulling the asset off the market, stabilizing some tenants that needed to be stabilized and putting it back out there. And so in that regard, not an issue. Heath, do you want to hit the second part of that? Oh, sorry. Can you get the second part of the question again?

Just what the yields are now on the impaired values for those sales?

One of the properties is land, another is our medical office building which has low occupancy, and the third is City Center. I would prefer not to specify an exact cap rate for City Center, but the positive news regarding the Carillon sales is that this is a way to reduce dilution. We are selling one property that generates no net operating income and another that has minimal net operating income. We believe these are positive developments and will keep you informed.

Yes. And just to be clear on City Center, it's really not like a going-in cap rate exercise. It's an IRR exercise for the buyer because there's a lot to do there. So it's not really relevant.

Okay. John, I know you mentioned the ranking of the capital uses for the $500 million. I'm curious about buybacks specifically. I understand it's complicated, but how do you balance the FFO yield or AFFO yield against the potential impact of reducing liquidity for the stock and the other nonfinancial issues that could also affect the multiple going forward?

Yes, we expect that ultimately the multiple will be significantly higher than it is today. I am very confident that in two years, the stock will trade at a much higher multiple and price than we are seeing currently. The analysis can be complex and isn't solely mathematical. While the numbers provide a direction, we also need to consider market cap and business size. Even if we were to invest all our resources into a buyback, which we won't, those figures are relatively small. I believe we are currently capitalizing on a clear arbitrage that we will look back on positively in the future. Additionally, it's important to focus on the future composition of our assets and the embedded growth rate of our business. Many companies have seen short-term growth over the past four years, which is beneficial, but we need to consider what our business will look like in the next decade. We are positioned to be among the best companies and will maintain one of the strongest growth profiles and balance sheets. We will carefully evaluate all factors and their implications. Given the current business landscape and opportunities, this is the ideal time for our actions.

And I know it's a two-question limit but maybe slip a third one here. I mean you guys are really trying to arb this, other REITs have tried this in the past, selling assets, buying back stock. I mean, at what point do you look to other ways to maximize value if the public markets don't want to recognize kind of the private market value of Kite and maybe even some of your peers?

Let me clarify that our actions are a result of changing the composition of our portfolio, not a decision to buy back stock at a specific price for any particular reason. We are adjusting our portfolio to enhance long-term growth. As part of this process, we have funds to distribute, and it makes sense to use them in this way at this time, especially given the difference in core FFO yield compared to the assets we've sold, which we believe will persist in the short term. There's also an extreme discount present. Moving forward, this will be about real estate, and the results from the asset sales need to be effectively deployed. It's not the other way around. Previous attempts made by others are irrelevant to our situation. This is a unique effort to improve our portfolio, supported by a strong balance sheet that offers flexibility. I have seen this done in the past with companies that have leveraged balance sheets, which didn’t work well. This is entirely different. As we proceed, we will gauge the outcomes. Due to the nature of being a REIT, we may need to issue a special dividend, which we haven’t discussed much yet but plan to do as part of our obligations. While it's not our main priority due to capital usage, we are also focused on providing total returns to our shareholders annually. Ultimately, we want this to be a sustainable model that attracts shareholders with high returns. Presently, there is substantial investment going to other regions, but I believe that eventually, investors will return to the reliable cash flow growth that REITs provide. Overall, I think the timing of our strategy is very favorable.

Our next question or comment comes from the line of Michael Goldsmith from UBS.

Probably a good sign that we've made it this far and we haven't touched on the watch list for the full portfolio. So it feels like things have gotten a little bit better out there. Just wanted to get your assessment, what you're seeing, what your watch list is and what you're paying attention and how that impacts the kind of the setup for 2026.

Yes, sure. We think that the watch list is in good shape. And I think most of what's happening now is becoming much more isolated into individual tenant names more so than in the past when you had multiple tenants in trouble. And obviously, the crescendo of that was last year when you had multiple bankruptcies within 60 days. So now we're down to a much more manageable situation where there are individual tenants that we're not going to name that we're focused on and we're focused on reducing exposure. And look, part of this entire conversation this morning has been about improving the quality of the portfolio and reducing exposure. And even if you're getting short-term lease-up right now but you're remaining overly exposed, that will eventually come back to be a problem most likely. So this is all one big exercise around improvement, self-improvement and better growth. So I think that's coming. But as it relates to the specifics around tenant credit watch list, we always have them. The industry always has them. It's a natural evolution. And we said, look, when we got all these bankruptcies, there was a lot of people putting out lists and I've leased this many spaces in this period of time, that's not the exercise. The exercise that we engage in is, how do we get the best tenants, the best merchandising mix with the best growth. If that takes 18 months instead of 9 months, fine. This business could be around a long time and it's going to be a very strong business for a long time.

Got it. And so I'll follow that up with probably what you don't want to hear though. Last quarter, you talked about 80% of the boxes recaptured were either leased or in active negotiations. Is there an update on that? And can you just talk about the opportunities of those where you're kind of like holding back as you think about merchandising or finding better economics with a tenant?

Well, let me give you an update on our progress. Even though that's not our primary focus, Tom will provide the details, and we can discuss the second part afterward.

Yes. No problem. So we always marked up 29 bankruptcy tenants in terms of that original list that we talked about. At this point, we're at about 83% that are leased, assumed in LOI negotiations, et cetera. So we have 5 other properties that are out there. We are meeting on them constantly. They're probably the more challenging of the original list but we have confidence that we'll resolve those in due time and it gets a lot of attention. So no concern there.

I would like to emphasize that the names of the anchor leases we've announced this quarter demonstrate our commitment to quality and growth rather than just filling space. This year alone, we have signed 19 leases with 12 different retailers, which highlights our focus on diversity and quality, along with our attention to spreads and returns on capital. This approach may take a bit longer, but if you're aiming for returns on capital above 20%, it requires careful consideration. Additionally, our non-option renewal spreads are impressive, coming in around 12% to 13%, showcasing the strength of our portfolio and the business we are in. These factors are essential to our strategy.

So just to follow up on John, of the 7 boxes that we executed this quarter, our spreads were 37% and return on cost, 23%. So as we look at the remainder of this portfolio, we're setting a high bar and being very, very careful.

Our next question or comment comes from the line of Floris Van Dijkum from Ladenburg Thalmann.

Congratulations on the share buybacks; I think that was a smart move. I'm curious about the projected $500 million in sales later this year. Is the $45 million special dividend partly a result of that, or is the $0.20 special dividend linked to those sales? Could that amount increase depending on the closure of those dispositions later this year?

Yes, Floris, that's related to the prior transactional activity, mostly the GIC transaction. And actually, that number, I said up to $45 million, that's the maximum it could be. If anything, some of the assets that may sell this year may have embedded losses, which would reduce that. So just think about that $45 million being the top side and then potentially going lower depending on the mix of assets that we end up selling.

Yes. When Heath mentions embedded losses, he is referring to a tax basis, not a book basis, just to clarify.

It potentially provides significant additional funds for share buybacks, which is a positive development. Additionally, I want to mention Legacy West. I don't want to take away from your presentation at the upcoming NAREIT, but I've noticed that the ABR in place appears to have increased significantly since the initial acquisition. Could you discuss what is occurring with that asset regarding rents, renewals, and spreads?

Yes, it's remarkable. It's a fantastic asset that had lower than market rents, especially in the retail sector. The timing was ideal for a platform like ours that can boost those rents and enhance value. We have many positive developments happening there. When we initially purchased it, the average base rent in the retail area was around $65, and we are now exceeding that in all the new agreements we are making. As mentioned earlier, we have the capacity to access about 30% of that over the next three years since the acquisition, aiming for approximately a 20% mark-to-market increase. Everything is unfolding as we expected. The combination of our efforts and a wonderful partner with a similar mindset has been highly productive, and we anticipate doing even more together. Additionally, we are a significant player in the market, so we have multi-tiered strategies when engaging with tenants, as we have other assets available for cross leasing. There are other properties that tenants are eager to enter. This creates a beneficial cycle of repositioning and adjusting rent levels. We are very optimistic about both the property itself and the market, which is one of the top in the country.

John, if you could briefly discuss the impact of those $500 million in sales, how is that going to affect your cruising speed of 178 basis points? How much might that increase due to selling some of these lower growth assets?

Well, first, I'm glad to hear you say cruising speed versus cruising altitude because that's been a debate in the company, so you just answered it. Go ahead, Heath.

The embedded bumps in that pool of assets are around 140 basis points. This will certainly enhance our cruising speed, but since the denominator is quite large, the impact will be relatively modest. Nonetheless, everything is progressing in the right direction. As John mentioned, improving our cruising speed by 20 basis points in 18 months is remarkable. This improvement primarily comes from better performance in small shops and modest enhancements in the larger anchors. We anticipate reaching 2% soon, and when we achieve that in embedded bumps, we'll aim for 2.25%. We will continue to drive this effort. Additionally, the occupancy-driven growth that many are currently experiencing will eventually taper off. Ultimately, we prefer to be in a position where our cruising speed is higher than our competitors, and this is a key aspect of the overall real estate strategy we discussed on this call.

Yes. I mean that's the real message for us today is that this is a first step in a process of really focusing in on organic growth. And when you have a balance sheet like ours and you have organic growth that's near the top of the space and the balance sheet that we have, then we're able to do other things outside of the organic growth that can even add to that. So that's really the goal. And I think we have, frankly, we have absolutely been, I think, the market leader in focusing in on this embedded growth and fighting the fight that has to be fought in the trenches to get that. And perhaps that's why the occupancy trailed a little bit but then all of a sudden, you see us gain like 60 points, I think, or 60 basis points sequentially. And I think it shows you that the market is coming more to where we want to be. And if you look at the percentage of leases that we're signing in the small shop space at 3.5% and 4% annually, I mean, it's in the 60s percentage, like 60% of the deals we're doing. And then 3% is table stakes, right? So this is an indicator that this is a very good business to be in. There's not a lot of product and there's certainly not a lot of owners that have the ability to deploy all those different goals into what they're doing.

Our next question or comment comes from the line of Alexander Goldfarb from Piper Sandler.

I have two questions. First, regarding the $500 million in sales, I want to clarify that while I understand you plan to use the proceeds for buybacks, reinvestment, and other purposes, historically, significant asset sales often lead to a decrease in earnings until the proceeds are fully utilized and reinvestments start to generate growth. It seems like this might affect earnings in '26. Is that an accurate assessment, or do you believe that the $500 million will not impact earnings and we should expect them to remain flat in '26?

I mean, Alex, there are so many moving pieces and it depends on where is our share price going to be to the extent we're buying back stock. We're able to actually shield gains or does it have to go out as a special dividend because we're not going to do irresponsible acquisitions if we have a gain to shield. So there are so many moving pieces, Alex. I'll just go back to what John said in his prepared remarks because we're going to do our best to minimize the earnings disruption. So again, we'll have much more information on that in February of next year.

I would like to add that in the past, we have approached situations like this with careful consideration. The specifics vary from one party to another, and ultimately, the events of 2026 will unfold as they do. However, there is no doubt that our actions will lead to significantly better growth moving forward. In the interim, we will take every measure to limit negative impacts, though some of that is influenced by tax considerations. For instance, when making a special dividend payment, it results in cash leaving the company. Therefore, our main objective is to keep that to a minimum. We believe we will initiate a special dividend towards the end of the year, as we see it as an option. From a net asset value and future growth standpoint, the outlook is certainly promising.

Okay. And then just as another question along the portfolio lines, as – it sounds like you've reviewed your portfolio heavily and obviously, we're seeing what's happening in the market in terms of supply/demand and improvement across the industry. Is your view that this is it and that going forward, dispositions will be more targeted in normal course? Or do you think there's a potential for another $0.5 billion plus type portfolio transaction that could occur next year? Meaning, is there more culling on a large scale that you guys think that you need to do? Or you think that this really addresses the assets that you no longer want to have in the Kite portfolio?

I think it's too early to provide a definitive answer to that. We're continuously reviewing the portfolio and going through budgets right now. There are many considerations regarding which assets we want to retain for the long term. We have made it clear that our goal is to reduce our exposure to certain areas of retail and reinvest any proceeds into opportunities that offer a stronger growth potential. While it’s still early to predict, it's possible that we might pursue other significant asset sales in the future. However, at this moment, our focus is on completing our current objectives and determining how to allocate resources effectively.

Okay. And then if I could sneak in a third question, it seems to be a trend. Heath, regarding the bad debt, you guys have been around 85 to 90 basis points year-to-date, but you still have that 185 basis points for the full year. I assume that's just a placeholder and you don't intend to suddenly have 100 basis points of bad debt in the fourth quarter, right?

Yes, that's what your numbers indicate, with an assumption of 100 basis points in the fourth quarter. However, there is no special item involved. It's simply a matter of maintaining the same approach, whatever you choose to call it.

No. That is just us being conservative and basing it on historical norms of 75 to 100 basis points of revenues.

Our next question or comment comes from the line of Paulina Rojas from Green Street.

It's great to see you're pursuing that arbitrage opportunity and trying to reshape the growth profile of the company. Looking at your same-property NOI over the last 10 years, it's been around 2% or low 2%. So I know this is a difficult question but painting with broad brushes, if you layer in the initiatives that you have shared in this call plus the strong backdrop, how material do you think the upside to that same-property NOI growth could be relative to that 2%, low 2% range that the company has experienced?

Yes. Paulina, I'm not sure if you attended our Four in '24 event in February in Naples. We presented a slide discussing our organic growth, excluding occupancy, which we estimated to be between 2.5% and 3.5% due to bumps and spreads. The company's performance has indeed improved, as we suggested. Looking at the past decade, we had much lower embedded growth rates. Based on current trends, we're now anticipating growth closer to 2.75% to 3.75% moving forward. Our main focus is to enhance this cruising speed, with improving growth being our top priority. We're specifically concentrating on lifestyle and mixed-use properties, where the embedded escalators are between 2.25% and 2.5%. For the smaller format grocery segment, which we also favor, growth is projected between 1.75% and 2%, depending on the mix of shops and anchors. We're actively working to divest from the middle segment of our portfolio, which is currently at 1.4%. It's a valuable question, and we appreciate your retrospective view. Over the last three years, growth has faced challenges, partly driven by occupancy rates. The goal of this initiative is to enhance long-term growth potential.

Yes, I would like to emphasize that it's crucial to consider our past as it significantly influences our intention to change our trajectory, which is more vital than our historical position. Over the last four years, we have seen an average close to 4% growth, albeit with fluctuations in occupancy during that time. The main point I want to make, Paulina, is that if we analyze the entire sector, the short-term focus on same-store NOI growth varies in definition, making it challenging for everyone to compare. Therefore, we prioritize something more definitive: our embedded rent growth and the stabilization of our core and NAREIT FFO growth moving forward. Additionally, we consider the total return for our shareholders annually, which includes our dividend yield. We have consistently increased our dividend significantly. In the past two years, we have invested heavily in tenant improvements and leasing commissions while still generating substantial cash flow. Overall, we are optimistic about the future, though we recognize that there are several steps we must take to position ourselves accordingly.

My second question is about your presentation, where you highlight a very active quarter in terms of leasing activity with grocers. Based on your numbers, you're at 79% of ABR coming from grocery-anchored centers. Do you have a target in mind for this figure, or is that not something you consider?

No, I don't think there's a specific target influencing our decisions regarding leasing. When we add a grocery store to a shopping center that previously lacked one, it alters the customer demographic and increases daily activity at the location. A critical aspect we assess in grocery-anchored shopping centers is their growth rate. If you rely too heavily on the grocery store for your net operating income, it becomes challenging to achieve growth rates above 2%, and even reaching 1.5% can be difficult. The mix of stores and grocery options plays a role in this. However, the main takeaway from that slide is to highlight the existing demand. Some investors only seek grocery stores, but that’s not our aim; I believe it's essential not to overly rely on a single category. There was a time when the market only favored Kmarts, and that didn’t end well. Our focus is on diversifying our portfolio to foster rent growth beyond just grocery stores; that’s our objective. It's more significant than merely switching to a grocery store. Yet, successfully placing a Trader Joe's in a former Bed Bath & Beyond location or a Whole Foods in a big lots space is quite an achievement.

Our next question or comment comes from the line of Hongliang Zhang from JPMorgan.

I noticed that your tenant-related capital expenditure spending decreased significantly this quarter. Was this simply due to timing? How should we consider the spending moving forward?

You're talking sequentially?

Yes, sequentially.

Yes. Yes. It's just timing. It's a timing thing of signing a lease before you spend the money.

Okay. It sounds like the spending will return to the levels we saw earlier this year moving forward.

Yes. I think it's better to consider this on an annual basis rather than quarterly, as there is too much timing involved. Over the past few years, we have invested around $110 million on TI and LC, and this is likely to increase slightly next year and into 2027. To elaborate, in 2025, our total CapEx could reach approximately $165 million when accounting for maintenance CapEx and some development expenses. Meanwhile, we continue to pay a strong dividend, generate free cash flow, and maintain an excellent balance sheet. This combination of generating cash, funding the regrowth of our assets, and supporting future growth from development is very robust. We're also identifying more opportunities in development, and we believe that our extensive experience in the development sector gives us a competitive edge in knowing when to invest and when to hold back. Therefore, we are quite optimistic about the free cash flow being generated, which allows us to reinvest in growth.

Our next question or comment comes from the line of Alec Feygin from Baird.

So the anchor opening was a big driver in the third quarter. Just kind of curious what percentage looking into next year and even 2027 of the total anchor leases coming due have renewal options? And what are the expectations for those anchor retentions in 2026?

Sure. I don't have that percentage available right now, but I can say that the vast majority of our anchors have options. It really depends on the timing of whether they are out of options. Generally, nearly all anchors have options. When comparing the non-option renewal spread to the option renewal spread, it suggests that we might benefit from providing fewer options. This is part of the dynamics in our industry, and we are focusing intensely on this area, where we are seeing success in limiting options. However, the reality is that almost no anchor operates on a flat term without an option. It ultimately comes down to the percentage of anchors expiring in a specific year and whether they are at the end of that term. With grocers, they generally don't wait for the expiration; instead, negotiations happen beforehand. Often, there may also be a store rebuild involved, which we are currently managing in a couple of cases.

But we are finding many retailers inquiring with us about when do you have expirations with various boxes. So we're seeing a lot of activity on that front as well.

Do you expect any change in the retention rate looking into next year?

Yes. I mean, as I said earlier, we're entering our budget process right now, which is an intense bottoms-up every single property, every single space. And we'll talk to you about that after that. But I think we intend to have a successful season with budgeting.

Our next question or comment comes from the line of Kenneth Billingsley from Compass Point Research & Trading.

I wanted to follow up on the anchors you signed year-to-date that introduced new formats. Regarding small shop occupancy, it appears you have more opportunities for growth compared to your peers. Are the 12 new formats you are considering part of a broader trend across your entire portfolio aimed at enhancing small shop occupancy? Is this a move to upgrade retailers, or are you adjusting the retail mix at your properties in response to changing consumer demand?

I just want to clarify, you mentioned anchors but you're referring to small shops. I would like to understand the question a little better.

Essentially, you talked about that 12 of the 19 anchors you signed had new formats. I believe that's what you said at the beginning of the call.

Yes, yes, from different brands.

Yes.

I was just curious, are you trying to upgrade the retailers coming in as a reflection of shifting consumer demand and what they expect to see at the properties? Essentially, are you doing this to help improve small shop occupancy?

No. I think what we're trying to convey is that this business experienced a phase where some individuals simplified their processes by deciding to make multiple deals with a few select tenants instead of diversifying. We aim to diversify our anchor tenant mix to attract more interest in our shopping centers while minimizing excessive reliance on any single anchor. The outcome of this strategy is a better shopping center, which ultimately positions us to achieve higher growth in the small retail spaces, as these elements are interconnected and mutually beneficial. It's important to have the strongest lineup possible, but diversity is also essential so that consumers, who are our ultimate customers, choose our property over others.

Only thing I'd add is, some of this relates to the quality of our assets. And when you think about Southlake, you think about Legacy West, Loudoun and others, the diversity is really coming from a higher quality of tenancy, someone like a Crate & Barrel, a new deal with Adidas. So these are some of the names that we weren't necessarily doing in the past but this diversity is getting buoyed by this strength as well.

And just to carry on that, that's a great point. And not only does it happen at those individual properties that Tom mentioned but now we're able to spread this deeper pool of retailers across our whole portfolio. And frankly, these retailers want to work with strong landlords that have the ability to work with them in multiple locations, right? So it's kind of a virtuous cycle of tenant demand, if you will.

When you refer to the new formats, are these formats new to you or just new to the locations?

No, no. It depends on how you're classifying new format. Just to be clear, what we're talking about are brands, not the size of the store or anything like that. These are just multiple different brands, like the difference between a Crate & Barrel and a T.J. Maxx, for example. Those are different brands. The formats aren't changing. The sizes aren't changing. The space is the space. Our objective is to diversify those brands.

Our next question or comment comes from the line of Craig Mailman from Citi.

I just want to ask, as we talk about your overall portfolio, can you give us some sense of how you're viewing your diversification efforts relative to what's happening in the market with consumer preference?

Overall, we monitor our tenants, their credit profiles, and their business models closely. Our goal is to enhance the quality of our tenancy, and historically, we've done a pretty good job of that. Looking ahead, there are always opportunities to make adjustments in the space. As we've mentioned, there has been a shift in consumer preference, so it's essential to adapt in order to remain relevant in the marketplace.

I’m showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. John Kite for any closing remarks.

Well, I just want to take the time to thank everybody for joining. And as Heath said, we're really looking forward to seeing everybody quite soon, talking more about all the good things happening at KRG. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.