Earnings Call Transcript - KRG Q1 2026

Operator, Operator

Good day, and welcome to the Kite Realty Group Q1 2026 Earnings Call. (Operator gives instructions.) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Bryan McCarthy, Senior Vice President of Corporate Marketing and Communications. Please go ahead.

Bryan McCarthy, Senior Vice President, Corporate Marketing and Communications

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 today'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 are our Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; President and Chief Financial Officer, Heath Fear; Senior Vice President and Chief Accounting Officer, Adam Jaworski; and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. (Operator gives instructions.) I'll now turn the call over to John.

John Kite, Chairman and Chief Executive Officer

Thanks, Bryan, and good morning, everyone. We entered 2026 with an ambitious set of operational and strategic goals. And through the first quarter, we are firmly on target. Tenant demand remains healthy, our signed-not-open pipeline remains elevated and the underlying fundamentals of our portfolio have never been stronger. This is a result of deliberate work over the past two years to reshape KRG into a higher-caliber, faster-growing and more resilient company. We have sold over $600 million of noncore assets, entered into strategic and transformational joint ventures, repurchased shares at pricing well below consensus NAV and repositioned the portfolio squarely toward higher-growth and higher-quality grocery-anchored, lifestyle and mixed-use assets. These actions are proactive, decisive and disciplined, designed to capitalize on the disconnect between public and private market values while fundamentally elevating the company. The KRG you see today is significantly improved from where it was 24 months ago. The first quarter was another clear example of that discipline in action. We repurchased 6 million common shares for approximately $152 million and sold Coram Plaza, a noncore lower-growth asset. Together with the activity completed in 2025, we have now repurchased 16.9 million shares for $400 million at an average price of $23.67, representing a compelling arbitrage—buying our own stock at an FFO yield meaningfully wider than the yields at which we have sold lower-growth assets. As we advance through 2026, we will continue to evaluate capital recycling opportunities that further optimize the portfolio and support our long-term strategic objectives. None of this is possible without the strength and versatility of our balance sheet. Our ability to sell assets, repurchase stock, enter into strategic joint ventures, fund growth and continue investing in the portfolio is a direct result of the disciplined financial posture we have maintained over multiple years. We remain committed to operating with conservative leverage, ample liquidity and meaningful financial flexibility, which allows us to stay opportunistic while continuing to protect the long-term durability of the platform. That discipline is translating directly into operating performance. Demand for space in our high-quality centers remains exceptionally healthy, and our first quarter results reflect both the strength of the portfolio and the quality of our execution. Same-property NOI increased 3.6% in the first quarter, a strong start to the year. During the quarter, we executed 151 new and renewal leases, representing over 700,000 square feet. Blended cash leasing spreads were 13.5%, including 31.3% on new leases. Our non-option renewal spreads were 12.3%, demonstrating the continued mark-to-market potential embedded within our portfolio. Our lease rate stands at 94.7%, a 90-basis-point increase year-over-year, reflecting the continued absorption of our inventory by high-quality, well-capitalized retailers. During the quarter, we signed new leases with a variety of sought-after concepts, including On Running, Reformation, Warby Parker, Total Wine and Barnes & Noble. ABR per square foot reached $22.89 at quarter end, a 6.5% increase year-over-year. Our signed-not-open pipeline remains elevated at approximately $36 million of NOI, representing a 350-basis-point spread between our leased and occupied rates. The average ABR for leases in our signed-not-open pipeline is $28 a square foot. Embedded rent escalators are the first stone in the foundation of long-term total return, contractual growth that compounds over time. Two years ago, our embedded rent escalators were just 156 basis points. Today, they stand at 182 basis points. As we advance towards our 200-basis-point target, that trajectory is driven by factors within our control: strong lease structures, disciplined merchandising and the deliberate reshaping of our portfolio. Simply put, KRG is in an exceptional position. We have a better portfolio, a rock-solid balance sheet, a more durable growth profile and a team that continues to execute with urgency, discipline and focus. I want to thank the entire KRG team for the hard work that got us here and for the continued energy, commitment and conviction required to keep raising the bar. I'll now turn it over to Heath.

Heath Fear, President and Chief Financial Officer

Thank you, and good afternoon. After the first quarter, KRG is exactly where we want to be: on offense, on plan and operating from a position of strength. We are elevating the portfolio, sharpening the platform and building momentum for another highly productive year. Turning to our results. KRG generated $0.52 of NAREIT FFO per share and $0.52 of core FFO per share in the first quarter. Same-property NOI increased 3.6% in the first quarter driven primarily by a 250-basis-point contribution from higher minimum rents, a 55-basis-point improvement in net recoveries and a 45-basis-point improvement in overage rent. On our last call, I indicated our expectation for same-property NOI growth in 2026 to be lower in the first half of the year and accelerate in the second half. It's important to note that the 3.6% result in Q1 exceeded our expectations as a result of higher-than-anticipated average rent, lower-than-anticipated bad debt and the reversal of a large real estate tax reserve. As for the trajectory of same-property NOI for the balance of the year, we anticipate a moderation into the second quarter, followed by a reacceleration to the back half of the year as the rents from our large signed-not-open pipeline begin to commence. Due to our performance in Q1, we are increasing our 2026 same-property NOI range by 25 basis points at the midpoint. As illustrated on Page 5 of our investor deck, the uptick in our same-store guidance is being offset by a corresponding reduction in our recurring but unpredictable items. As a result, we are affirming our NAREIT FFO and core FFO guidance of $2.06 to $2.12 per share based on a same-property NOI growth range of 2.5% to 3.5%. Our bad debt reserve is 95 basis points of total revenue at the midpoint, reflecting our actual first quarter results blended with a continuing assumption of 100 basis points for the balance of the year. Interest expense net of interest income, excluding unconsolidated joint ventures, is $121.2 million at the midpoint, up from $121 million. This guidance fully incorporates the incremental $100 million of stock we have repurchased since our last earnings call and further contemplates $170 million of 1031 acquisitions scheduled to close in the second quarter. This represents a $60 million increase as compared to original guidance and $145 million of noncore and/or tax-loss-driven dispositions with $12.5 million closed in the first quarter and the balance closing in the back half of the year. This represents a $30 million increase in the disposition pool as compared to original guidance. As a reminder, the aforementioned 1031 acquisitions or noncore sales are not completed; it could result in a special dividend for 2026. The changes in our transaction assumptions are opportunistic and a continuation of our disciplined focus on matching sources and uses in an earnings-friendly manner. As John alluded to, moving to the back half of the year, we will continue to evaluate opportunities to further refine our portfolio, provided that we're able to prudently deploy the proceeds. Our balance sheet remains one of the strongest in the sector. As of March 31, our net debt to EBITDA was 5.2x, consistent with our long-term range of low to mid-5s. It is worth taking a step back to appreciate the level of transactional activity we've executed over the past 18 months while still maintaining one of the lowest leverage profiles in the sector. We have access to over $1 billion of total liquidity, providing us with significant flexibility to pursue value-enhancing opportunities. Thank you to the KRG team for their relentless efforts in driving our results and creating long-term value for our stakeholders. Operator, this concludes our prepared remarks. Please open the line for questions.

Operator, Operator

(Operator gives instructions.) Our first question will come from the line of Cooper Clark with Wells Fargo.

Cooper Clark, Analyst (Wells Fargo)

As we think about the share buyback program moving from $300 million to $600 million, I'm curious about the willingness to potentially upsize disposition volumes even higher in the back half of the year as we think about the $145 million of noncore assets contemplated in the back half given the demand for product in the market today and the ability to improve portfolio quality with potentially minimal dilution as we think about buybacks, coupled with 1031 acquisitions?

John Kite, Chairman and Chief Executive Officer

Sure. Cooper, I think as we said in the prepared remarks, we're going to continue to evaluate the market and evaluate the opportunities. We want to execute what we have in front of us in terms of the 1031 opportunities to try to close on in the next quarter. And it's always going to be a function of where cost of capital is, what the opportunities are to reposition the capital. So I think we're trying to make it clear that we're reviewing that. That's a potential opportunity. If you go and look at what we've done in the last year and you include what Heath has said is in the guidance, I mean, you're talking about if we execute on that, that's like $750 million approximately of sales. So this is significant. We continue to try to do that in a very meaningful way in the sense of how we manage the total portfolio, manage the balance sheet and manage protecting earnings as best we can. So that's a long-winded answer of saying, yes, that's a possibility, but a lot of factors are involved in that. Heath, do you want to add to that?

Heath Fear, President and Chief Financial Officer

No, those are okay.

Cooper Clark, Analyst (Wells Fargo)

Great. And then moving towards the economic occupancy side, I believe current economic occupancy is about 260 basis points below your historical highs, as many of your peers are near or above historical high economic occupancy. Could you talk about the opportunity set there longer term, and how much the signed-not-open pipeline may contribute to higher absolute economic occupancy levels in the back half of 2026 and 2027 as we also contemplate some more regular weighted churn?

John Kite, Chairman and Chief Executive Officer

Sure. I mean, we think we're bullish on our ability to continue to push occupancy higher, both economic and lease rate. We are, year-over-year, we're up; obviously, sequentially, we're slightly down, which is not unusual in the first quarter if you look back over the past four or five years. I think in three of those first quarters there was a slight sequential decline, but what we're focused on is the year-over-year growth. We do think there's real opportunity based on lack of supply and continued strong demand. But as we tried to point out, we're very focused on proper merchandising, and we're very focused on getting the right retailers in the right spaces and trying to pursue this embedded rent growth that is going to pay dividends in the future. So we're not in a super hurry to hit any particular number, but we do feel like there is really strong demand. And that's part of what we're doing in terms of repositioning the portfolio in the sense that this stronger portfolio will be able to maintain higher occupancy over longer periods of time. So again, yes, we believe we have plenty of room to run.

Heath Fear, President and Chief Financial Officer

I would add a lot of attention, questions and comments have been around the transactional activity and refining the portfolio. But at the end of the day, one of the biggest opportunities in front of us is that core opportunity in leasing. If you look across, as you said in your question, Cooper, we've got the most room to run in terms of just growing organically. So all this other stuff is certainly moving us along, but let's not lose focus that we've got the most occupancy run left.

Operator, Operator

One moment for our next question. And that will come from the line of Samir Khanal with Bank of America Securities.

Samir Khanal, Analyst (Bank of America Securities)

I guess, John or Heath, maybe expand on your comments on capital recycling, broadly, what you're seeing in the transaction market and the interest level that you've gotten for your assets that you could potentially sell down the road?

John Kite, Chairman and Chief Executive Officer

Sure. I'll start with that, Samir. I mean there is strong demand for open-air retail, and it's coming from many avenues. In the last six to nine months, and even in the last six weeks, you see a lot more institutional capital positioning to want to be in the space—a rotation, if you will. So that obviously puts pressure on cap rates to move down over time, and we really still haven't seen a movement in interest rates. If that happens in addition, that would be additional fuel. But even without that, the demand is strong. I think when people look at their portfolio and they look at how they balance it and they look at risk-adjusted returns, our product screens well. So you have seen that. We still have this ability and hope to continue to do what we're doing, which is if we're going to recycle capital, we want to recycle it into higher-growth assets. If you look at Page 6 of our investor deck, it shows what we're doing. A couple of pages later, you see the embedded rent growth charting up; it's going up. As long as we're able to sell these lower-growth assets at yields well inside the stock yield, that's attractive. How we deploy that capital comes down to a complex set of items based on taxable income, 1031 opportunities and stock price. But it's really a real estate exercise. We are very focused on the real estate exercise. The equation relates to what we do with capital, so it's complex, but right now we think there's opportunities. Heath, do you want to add?

Heath Fear, President and Chief Financial Officer

I would just say, Samir, there isn't a pocket of historical retail capital that hasn't been reignited. So the breadth of the demand is just incredible. Frankly, it's better to be a seller right now than it is to be a buyer. With that said, we do have some traction on some of these 1031 acquisitions that we've been talking about. So yes, the market is very, very constructive right now.

Samir Khanal, Analyst (Bank of America Securities)

Got it. And then I guess my second question, Heath, is on the guidance. You raised same-store at the low end of the high end, but we didn't see a follow-through on FFO. Could you unpack that?

Heath Fear, President and Chief Financial Officer

On Page 5, you'll see that the same-store increase boosted us by $0.05 on a full-year basis, but that was offset by a corresponding reduction in recurring but unpredictable items. Basically, that item is still there; it's just being pushed into 2027. So timing-wise, we thought it would be '26 and it's being pushed into early '27. So nothing permanent happening there. That is why the same-store bump didn't flow through to FFO.

Operator, Operator

One moment for our next question. And that will come from the line of Todd Thomas with KeyBanc Capital Markets.

Todd Thomas, Analyst (KeyBanc Capital Markets)

Beyond the capital recycling that you have lined up right now and with what's under contract, would you move forward with the dispositions without new investment opportunities lined up? Or is the plan really only to activate incremental dispositions if you have something on the buy side?

John Kite, Chairman and Chief Executive Officer

Todd, as you know, our goal is always to pair these things. We like to do stuff in pods, buying and selling. But of course, we're also opportunistic. If we think there's a really excellent opportunity to recycle out of a lower-growth asset at an attractive yield versus other yields, it is possible that we would do that even without knowing exactly where the capital would go. A strong balance sheet affords us the ability to be forward thinking. The goal is always to try to couple these things, but we'll see how it plays out.

Todd Thomas, Analyst (KeyBanc Capital Markets)

Okay. And does the current disposition pool, the $145 million—although I think you mentioned the $12.5 million was included in that in the first quarter—does that pool include City Center? Can you provide an update on progress for that asset disposition?

Heath Fear, President and Chief Financial Officer

It does include City Center, Todd. We had hoped to have transacted on City Center by now. But as we've said in the past, it's a complicated vertical asset and the plan is still to transact before the end of the year.

Operator, Operator

One moment for our next question. That will come from the line of Michael Goldsmith with UBS.

Michael Goldsmith, Analyst (UBS)

First question is just on the same-store NOI growth for the quarter. It sounds like you were pleasantly surprised with the upside to that number due in part to upside to overage and net recoveries. Is there anything in the backdrop that is driving those numbers higher than you expected? And what would you see as the run rate number for the second quarter before it reaccelerates as the SNO start to kick in?

Heath Fear, President and Chief Financial Officer

Yes. The outperformance was rateable between three things: bad debt, overage and a real estate tax reversal. As I said in my opening remarks, you'll see it moderate into the second quarter and then reaccelerate to the back half of the year. Moving into the back three quarters, we still have opportunity to outperform on bad debt. We had 75 basis points of bad debt in the quarter, and we're still assuming 100. So there's still some things we hope to be able to outperform in the same-store line as we move through the year.

Michael Goldsmith, Analyst (UBS)

For the record, I'm not complaining that the number is higher—just communicating...

Heath Fear, President and Chief Financial Officer

You were not complaining. We were happy.

Operator, Operator

One moment for our next question. And that will come from the line of Floris Van Dijkum with Ladenburg Thalmann.

Floris Gerbrand Van Dijkum, Analyst (Ladenburg Thalmann)

Just curious, the $36 million SNO pipeline: not all of it is same-store. I think only 84% of it is in the same-store pool. Could you clarify which pieces are not in same-store? Is that Legacy West that's not part of the same-store pool, and can you talk about the upside there and when that becomes recognized in same store?

Heath Fear, President and Chief Financial Officer

It's really two elements there, Floris. One is Legacy West: we have an annual same-store concept, so Legacy West won't be in the same-store bucket until we've owned it for a full calendar year. So you will see it in 2027 as part of the same-store pool. The other piece that's not included in same store are the leases that we're executing aloud—those are the leases where construction is underway and are not yet in same store. Those are the two major components outside of same store that comprise the signed-not-open pipeline.

Floris Gerbrand Van Dijkum, Analyst (Ladenburg Thalmann)

Got it. And as my follow-up, you've done a lot of anchor repositioning and added a number of new grocery concepts to your portfolio, including Trader Joe's and a couple of Whole Foods. You talk about the returns on capital there, presumably that's the direct return on invested capital. What is the typical effect to shop leasing and rents in your portfolio when you add one of those grocers, and what would you say is your fully adjusted return on capital if you include those effects?

Tom McGowan, President and Chief Operating Officer

So Floris, there's no doubt that if we bring a Trader Joe's or a Whole Foods, there's tremendous impact: consistent shopper traffic throughout the day. Both of those are tremendous drivers for us. When new deals are going into committee, it helps tremendously, and that consistent shop helps drive additional sales throughout. So you have the cap rate compression component, and in addition you have lease-up through new deals and you're driving sales inside your existing tenant base. We always find a way to generate strong returns on these boxes. If you carry the adjacent-shop uplift into the return calculation, that factor grows incrementally—probably 2x to 3x more than the initial return in terms of basis points. So it's wildly attractive for us to reposition like that.

John Kite, Chairman and Chief Executive Officer

Floris, the returns we're generating on capital are often in the 30% range. It depends on the deal—it could be 20%, it could be 40%. Generally speaking, that's return on capital spend for that retailer. We don't always quantify it relative to the adjacent-space uplift other than the ability, as Tom said, to drive a cap rate down by adding a grocer. It's not all about that—it's about merchandising, too. Adding Trader Joe's and Whole Foods improves the quality of the surrounding shop. That underpins our higher ABR and the $28 ABR in the signed-not-open pipeline versus the portfolio average. It is definitely moving us in the right direction.

Floris Gerbrand Van Dijkum, Analyst (Ladenburg Thalmann)

By the way, your ABR growth year-over-year is 6.5%, which seems pretty strong. Is that one of the highest growth rates you've experienced?

John Kite, Chairman and Chief Executive Officer

Yes. It's been a pretty good growth rate over the last five years. I don't have the full history in front of me, but 6.5% is a strong year-over-year result. When you look at our ABR and add our embedded rent growth and compare that to the peer group, it doesn't reflect where we trade. It's an important datapoint that supports the strategy we're pursuing.

Operator, Operator

One moment for our next question. And that will come from the line of Michael Mueller with JPMorgan.

Michael Mueller, Analyst (JPMorgan)

Maybe somewhat of a follow-up. Aside from general portfolio leasing capital, is there any visibility as to how much your annual development or major redevelopment investment could grow over the next, say, three to five years?

John Kite, Chairman and Chief Executive Officer

Michael, we don't generally throw out a specific target for annual development or redevelopment spend because we prefer to pursue great opportunities rather than chase a number. We've moderated development spend the last couple of years because of significant capital tied to lease-up in the portfolio, which on a risk-adjusted basis provides a high return. Over the next three years, that internal lease-up spend will begin to slow as those projects stabilize. We're currently spending a little over $100 million a year on lease-up activity; as that moderates, we'll have more choices to deploy free cash flow. We have a long history in development and redevelopment and we know how to judge risk. I would say we will pivot more to development and redevelopment over the next couple of years and you'll see us do some smaller projects rather than a few huge ones. We have a large one at One Loudoun, but it's manageable against a $7 billion balance sheet. Long-winded way of saying that we can lean into that as the lease-up firms over the next two years.

Heath Fear, President and Chief Financial Officer

I would add, don't construe the current lower development spend as a lack of development opportunity in the portfolio. We still have attractive opportunities, particularly at Loudoun. We still have 35 acres of land after this expansion, which could include another 1,100 multifamily units and another 1.7 million square feet of commercial. So we've got lots of opportunities, but the current priority right now is leasing. When that spend starts to climb, that pipeline will pick up.

Tom McGowan, President and Chief Operating Officer

Loudoun is moving along very nicely in terms of the lease-up as well.

Michael Mueller, Analyst (JPMorgan)

Got it. And second, I apologize if I missed this someplace, but what's the range of cap rates for the 1031 and noncore sales?

John Kite, Chairman and Chief Executive Officer

We didn't lay out an exact cap-rate range, Michael. But in terms of the 1031s, we continue to see opportunities for assets we want to own at unlevered IRRs in the 8% to 9% range. That's kind of what we're pursuing. The types of assets we're selling are generally in the mid-to-high 7% cap-rate range depending on the asset. That's the current trade we're seeing.

Operator, Operator

One moment for our next question. And that will come from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb, Analyst (Piper Sandler)

As we look at the SNO pipeline, there's a pretty good ramp from now through 2028. Is there any way to accelerate this? Or is a lot of this structurally dependent on tenants already having to wait for their existing leases to expire and the time it takes for build-out and move-ins? In short, can the timing be materially accelerated or is it mostly structural?

John Kite, Chairman and Chief Executive Officer

Alex, we are always trying to accelerate build-out for SNO spaces. A lot of this is former anchor space, which carries longer gestation periods. Lease signing to rent commencement could be 15 to 18 months depending on construction scope. Municipal permitting and approvals in multiple markets can also slow timelines. We push hard to accelerate, but there are practical constraints. The good news is demand is strong and the signed-not-open rents reflect where we're going as a company.

Tom McGowan, President and Chief Operating Officer

Alex, we're doing everything we can—permit expeditors, starting drawings right out of a real estate committee. We pull every lever. It's a huge objective around here to move those up.

Alexander Goldfarb, Analyst (Piper Sandler)

Between you and Tom, I never have to worry about not moving quickly. Second question: following the Quorum sale and your other dispositions, have you outlined how much more of your portfolio you think does not fit with where you want to take the portfolio? Is it still a meaningful percentage like 10% or 20% more, or are most of the lower-performing assets gone and now it's more fine-tuning?

John Kite, Chairman and Chief Executive Officer

We continually analyze the portfolio. There definitely are assets that don't fit the future KRG. As we said in the prepared remarks, we still have a goal of pushing our embedded rent growth to 200 basis points versus where we are today. Some assets we're selling are high-quality but lower-growth; a few simply didn't fit at all, like Quorum. The larger portion is assets that lack the growth profile we're looking for and that might be more exposed to future tenant risk. It's not a huge portion, but there is a methodical effort around future growth and real estate quality.

Heath Fear, President and Chief Financial Officer

When we started this disposition program, we wanted to ensure this is not a multi-year program that results in FFO dilution over three, four or five years. The intent was to get it done in 2025 and 2026. There are a handful left and if we can get it done and deploy proceeds prudently we will. If we can't, that's okay too. We'll cycle out one to three assets a year as we normally do.

Operator, Operator

One moment for our next question. And that will come from the line of Alec Feygin with Baird.

Alec Feygin, Analyst (Baird)

One for me is about Legacy West. How has it performed versus initial expectations? And has there been any incremental opportunity for new tenants at Legacy West to expand to other assets in the portfolio?

John Kite, Chairman and Chief Executive Officer

Legacy West has performed marvelously. It's been a great asset for us and our partner. We've made significant progress in a short period of time on increasing rents, particularly on the retail front. We've announced many new leases since acquisition, and the mark-to-market on the retail rents has been in line with our expectations. The retail ABR was around $65 a foot at acquisition and we're doing deals north of $100 a foot routinely. That's been spectacular. The multifamily side has picked up, and the office is really strong—it's high-quality office in a sought-after submarket in Plano. AT&T's recent announcements in Plano are another positive for that submarket. We feel really good about Legacy West. Bringing that asset into the portfolio has helped us sign high-quality tenants across our broader portfolio because those tenants are now aware of KRG. It's been a massive win for us and our partner, and we're looking for more opportunities like that.

Operator, Operator

One moment for our next question. And that will come from the line of Craig Mailman with Citi.

Craig Mailman, Analyst (Citi)

Going back to the operating portfolio, just looking at percent leased over the last several quarters: small shop got briefly over 92% but is down slightly below. What's the internal outlook and time frame to get small shop maybe to 93% plus? What's been the obstacle to ramping it as quickly as anchors?

Heath Fear, President and Chief Financial Officer

We don't guide to occupancy, Craig, but we've said publicly that we think by the end of this year we should be at occupancy levels approximating our historical highs prior to COVID. We don't think that's out of reach and expect to see occupancy gains through the back half of this year into 2027. At the end of last quarter our small shop occupancy was about 92%, which was 40 basis points away from the historical high and took a seasonal step back in Q1. We think we can lease through 92.5% to maybe 93% or 94% of the small shop space. On the anchor side, the sequential step back this quarter related to Value City, but we're actively backfilling those boxes and making great progress. We're very bullish on occupancy opportunity—it's one of the largest opportunities in the peer set.

Tom McGowan, President and Chief Operating Officer

One other thing we've been doing, Craig, is being proactive in improving the tenant mix. If a tenant is coming off a non-option scenario and we can do better, we'll move them out and replace with a higher-quality tenant. We've been doing a lot of that in these numbers and we'll continue to do it. We're making great decisions and attracting great tenants.

John Kite, Chairman and Chief Executive Officer

Craig, I talked a couple of years ago about the fact that we're never going to lease space quickly at the expense of quality. We will lease diligently. You could do deals faster by accepting tenants or rent structures we don't like, but if you are diligent and put in tenants that deliver 3.5% to 4% rent growth in shops, you'll be better off in a couple of years. Our strategy has emphasized durable, quality lease structures, and that's reflected in our rent growth leadership in small shop spaces over the past several years.

Craig Mailman, Analyst (Citi)

That makes sense. Going back to capital recycling, John, I think you said earlier that if you include what was sold last year and what you have under guidance this year, that's close to $750 million of sales. Is that right?

John Kite, Chairman and Chief Executive Officer

No. What I said was if you look at what we sold last year and then combine what Heath pointed out we're targeting to sell this year, that aggregate is approximately $750 million. We're still working through about another $130 million this year to get to that combined number, and that's just what we've identified. We'll see how that plays out across the three remaining quarters of the year.

Craig Mailman, Analyst (Citi)

If you could snap your fingers today, where would you like the mix among neighborhood, regional, power and lifestyle assets to be to maximize risk-adjusted returns? And how much of what you'd have to sell to get there is difficult versus attractive to buyers?

John Kite, Chairman and Chief Executive Officer

Everyone classifies categories a bit differently, but as we've identified in our investor presentation, our power assets are down roughly 500 basis points and sit around 19% of ABR. We'd like to get that down to the low-to-mid teens. We'd also like to pivot more toward neighborhood and grocery-anchored product and lifestyle. But more than a specific percentage mix, it's about embedded rent growth and quality of real estate. Compare our ABR and embedded rent growth to the peer group and where we trade—there is an opportunity to improve valuation over time. We'll take it one step at a time. We've identified what we want to do and if opportunities present themselves over the next three quarters we'll act, and after this year we'd expect the portfolio composition to be stronger.

Operator, Operator

I'm showing no further questions in the queue at this time. I would like to turn the call back over to Mr. John Kite for any closing remarks.

John Kite, Chairman and Chief Executive Officer

Well, I just again want to thank everyone for joining us today, and have a great day.

Operator, Operator

This concludes today's program. Thank you all for participating. You may now disconnect.