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Good day and thank you for standing by. Welcome to the Q2 2023 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised 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 second 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.

All right. Good morning, everybody. Thanks a lot, Bryan. During the second quarter, KRG delivered outstanding operational results, while continuing to fortify our best-in-class balance sheet. The demand for our high quality space remains strong and we are in a prime position to continue to drive pricing, improve our overall long-term growth profile, enhance tenancy and further grow our revenue and cash flow. Turning to our results. We generated FFO per share of $0.51, beating consensus estimates by $0.03 per share. Our same-property NOI growth for the quarter was 5.7%, as compared to the same period in 2022. Our outperformance in the first half of the year is allowing us to increase our NAREIT FFO guidance by $0.03 at the midpoint. We are also increasing our same-property NOI growth assumption by 75 basis points moving from 2.75% to 3.5%. Heath will provide more details around our quarterly results and updated guidance. We signed 190 leases, representing over 1.3 million square feet producing a sector leading 14.8% blended cash spread on comparable new and renewal leases. Excluding the impact of option renewals, our blended cash spreads were 24%. More importantly, KRG earned a 32% return on capital for new leases. As I have emphasized previously, leasing existing space provides the best risk adjusted return for our invested capital. While our ability to drive pricing on initial rents remain strong, we are taking this opportunity to redefine our long-term growth trajectory. Recognizing the favorable supply and demand dynamic in open air retail, at the outset of the year, we focused our leasing efforts on implementing higher fixed rent bumps and CPI adjustments. I am pleased to report that through the first half of 2023, we have been extremely successful with this initiative, 80% of our new and non-option renewal leases signed have fixed rent bumps that are greater than or equal to 3% and 40% of those leases have CPI adjustments. The average annual fixed rate -- fixed rent increases for new and non-option renewals in the first half of 2023 was 2.4%, including both our small shop and anchor tenants, which is 90 basis points higher than our portfolio average. We are laying a solid foundation to improve our long-term embedded growth profile. Based on the current tenant demand, I can’t think of a better time for KRG to upgrade the merchandising mix at our centers. In a different leasing environment, the liquidation of Bed Bath could have been a real jolt to the sector. Instead, it’s providing to be one of the best opportunities we have been afforded. I was adamant about maximizing this opportunity by prioritizing the best solution over the fastest solution. That said, I am pleased to report that we are making great progress backfilling those boxes at higher rents with better tenants. The pool of tenants to backfill the attractively sized and well located boxes is deep and diverse. Thus far, we are negotiating with 15 different brands across the retail spectrum, including grocery, sporting goods, big box wine and spirits, home furnishings and off-price apparel. Heath will provide more detail on the current status and we look forward to providing updates as we progress. Our success in enhancing the merchandising mix is not limited to the Bed Bath basis. Year-to-date, we have opened two grocery stores in the portfolio and have an additional four grocery stores in the sign, not open pipeline. In addition to adding grocers to the portfolio, we also have several opportunities to add multifamily units to our mixed-use and lifestyle portfolio. We currently have an ownership interest in nearly 1,700 apartment units and have entitlements for an additional 5,000 units. We look forward to further densifying our properties at healthy risk adjusted returns and partnering with best-in-class operators when appropriate. The KRG team continues to capitalize upon the demand for open air retail and the resiliency of our cash flows. Our efforts to enhance our merchandising mix, drive pricing power and increase our long-term embedded growth profile will undoubtedly increase the value of our open air centers. We have often talked about the optionality afforded to owners of high quality real estate. That same optionality is exponentially increased when supported by unparalleled operational acumen and a best-in-class balance sheet with substantial liquidity. We are extremely well positioned to seize the opportunities that lie ahead. I want to take a minute to really thank our team for their continued dedication, outperformance and commitment. I will now turn over the call to Heath.

Good afternoon. I want to start by thanking our operational team for once again allowing me to share the good news. Quarter after quarter it’s been a privilege to report on your considerable accomplishments. KRG exceeded expectations by generating NAREIT FFO per share of $0.51 during the second quarter and $1.02 year-to-date. The quarterly outperformance was primarily driven by higher-than-anticipated same-property NOI, which grew by 5.7% during the second quarter and 6.1% year-to-date. During the second quarter, increased occupancy and rent escalators were the primary driver of our same-property NOI growth with a 360-basis-point increase in minimum rent and net recoveries, 140-basis-point increase due to lower bad debt and a 70-basis-point increase in overage and other revenue. As John alluded to earlier, we are raising our NAREIT FFO per share guidance range to $1.96 to $2, representing a $0.03 increase at the midpoint. $0.02 are attributable to a corresponding increase in the same property NOI growth assumption as a result of lower bad debt, payment of post-petition rent from Bed Bath & Beyond and higher overage rent. The other $0.01 is related to an unbudgeted termination fee. Our updated guidance incorporates the following assumptions regarding the back half of 2023. We are assuming no additional rent from Bed Bath & Beyond, Specifically, we expect the gross rent from Bed Bath locations to be $0.02 less than will be collected during the first half of the year. We are prudently assuming bad debt to be 125 basis points of revenues for the balance of 2023, which, when combined with the actual bad debt experience in the first half of 2023 equates to 85 basis points of revenues for the full year. We are anticipating a deceleration of fee income as the first phase of Hamilton Crossing project nears completion. We are not modeling any additional termination fees and while we sold two assets in the quarter, we anticipate the impact of transactional activity will be essentially neutral to earnings as the blended cap rate on the transactions is well below the interest income offset. Our balance sheet continues to be in an enviable position, with net debt-to-EBITDA of 5 times. Debt service coverage ratio of 5 times -- 5.3 times, 97% of our NOI is unencumbered, over $1.2 billion of liquidity, an undrawn revolver, minimal floating rate debt, a well-staggered maturity schedule and multiple capital sources. These metrics allow our team to remain intently focused on operational excellence and provide us with the flexibility to immediately pivot and capitalize for a compelling opportunity arise. We have only $95 million of debt maturities remaining in 2023, which will satisfy with cash on hand and proceeds from our line. As for the $270 million coming due in 2024, we continue to remain opportunistic as it relates to the unsecured debt markets. The good news is that our indicative spreads have materially tightened recently, which further verifies our patient approach. Before turning the call over to Q&A, I want to take a moment to further elaborate on the progress we are making, whether to backfill into Bed Bath & Beyond spaces. We ended the first quarter with 22 units representing 1.4% of ABR and 522,000 square feet of GLA. Thus far, three units were acquired in the bankruptcy auction, six units are either leased or under a signed LOI and 11 units are an LOI negotiation. As John mentioned, enhancing our merchandising mix with 15 different brands generating strong spreads and returns on capital and further bolstering the durability of our cash flows is a tremendous opportunity for KRG. Thank you for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.

Yeah. Hi. Good afternoon. John, first question, you opened up by commenting that you are working to drive an increase in the long-term growth of the portfolio and talked about some of the success that you have realized this year. I am just curious what you think the impact of some of those initiatives are having on the stabilized growth of the portfolio today, maybe at full occupancy, if you think about it that way and how that compares to maybe five years or 10 years ago? And then is there a target that you are working to achieve in terms of that long-term growth rate for the portfolio, either in terms of the escalators or otherwise and when do you think you might achieve that?

Well, I think, I mean, as you know, Todd, it takes time for that to work through the portfolio. But I mean there’s no question that the embedded rent growth that we are achieving in 2023, as I mentioned very specifically, is significantly above where the portfolio average was almost 100 basis points. And I hope you caught when I was talking about it in terms of what we have achieved this year, we were including both the anchor and small shop space, but the reality of that is that the ability to really drive that growth and have it come to fruition more quickly is going to be in the shop space, because of the quicker turns and the better ability to get those 3% and 4% annual bumps. And then candidly, the CPI adjustment is an insurance policy that we have also added to that and that used to be fairly -- when I said it used to be, a long time ago, that was a very typical part of the business and over the last got 10 years, there wasn’t a lot of talk about that. And we set it out in the beginning of the year. I mean we set goals in the beginning of the year and that was absolutely one of the goals and our team delivered it. And so, without getting extremely specific and giving modeling information, I mean, it’s going to help us there’s no question. And more importantly, it’s a function of the interest in open air retail, all right? So you can break down a lot of different things, but when you look at our non-option renewal spreads, okay? And you look at this part of our business that we are able to now function -- now pull in these annual bumps 4% or 3% with the CPI adjustment, that tells you the business is extremely healthy and I know there’s a lot of talk out there about, how is the health of the business. The health of the business is very strong, and for us, in particular, it’s very strong.

Okay. Are you having success driving annual escalators with tenants with anchors maybe in certain categories and with certain credits that have historically pushed back on escalators? Are you seeing those changes or realize…

Yeah. I mean…

…there?

I will comment and I will have Tom jump in. I mean, from my perspective, absolutely, we are having success having those conversations. That being said, I mean, the anchor side of the business is more difficult to get that done. So, historically, would we be happy with a 10% increase after five years in an anchor deal. That would be pretty typical. Now we are trying to push that a little further. So it’s not as readily available because of the way the turnover happens. We just have less turnover there. But, Tom, do you want to comment too?

Yeah. I think we have to take a look at this in steps and we are in the early stages of trying to educate and work with larger box tenants and instead of no bumps in five, maybe we take a look at a shorter term of three and then we start the bumps. And so we are using different tools to get to the same place, but it will take us longer, but we are very much focused on not only the small shops, but the anchors as well. And as long as we have this focus, as long as the team is ready to go, we expect to make nice advances.

Okay. And then, Heath, a question for you, the portfolio’s leased rate decreased 70 basis points versus last quarter, but build occupancy was unchanged at 92.3%. Can you speak to that in light of the Bed Bath boxes that you recaptured during the quarter and also maybe provide a little bit of detail around the expected trends for the portfolio’s leased and economic occupancy rates moving into the second half of the year?

Sure. So, Todd, as you know the lease rate is basically a point of time at the end of the quarter. So you are looking at that day and you are saying this is how much is leased, whereas your economic occupancy represents your average occupancy during the quarter. So the full impact of the Bed Bath is running through your lease rate, but it’s not running through your economic but occupancy. That’s why you also saw a compression on your spread between your lease and occupancy. So as we move into the back half of the year, you will see the occupancy start to track the least in terms of its fallout from the Bed Bath. So that explains why that delta happened. That explains why we are flat in the occupancy, but we are having a more decline in the leased rate. In terms of the trajectory, Todd, as of the first half, we only had eight that bats were out of our occupancy and lease numbers. We are going to add an additional 14 to that coming into the third quarter. So you are going to see our leased and occupancy rates sort of trough into the third quarter. So putting some numbers around it, it’s about 120 basis points just Bed Bath alone. So, again, you will see that drop, and then over the course of time, as we start to sign up those Bed Bath & Beyond leases, you are going to see number one, our SNO grow, and you will also see that spread between lease and occupied grow as well. So that’s kind of how to think about the balance of the year.

Okay. That’s helpful. All right. Thank you.

Thanks.

One moment for our next question. Our next question comes from Craig Mailman with Citi. Your line is open.

Hey, guys. Heath, maybe just a follow-up on Todd’s last question on occupancy. As we think about kind of isolating the Bed Bath, which you did 120 basis points, but then factoring in the commencement of the SNO pipeline. I mean how much of that would offset kind of this drag from Bed Bath kind of hitting the numbers in the second half?

Yeah. So, Craig, we don’t guide to occupancy at the year-end, so that’s kind of where you are going with this. So I would tell you that, I don’t think the lease rate is not going to move, because obviously, those are already signed. In terms of the economic occupancy, I don’t think it’s going to catch up the full 120 basis points from the Bed Bath. So I think we will be ending the year probably at a spot that’s lower than where we started the year. But that’s really as much direction as I can give you, because, again, 120 basis points, obviously, is a lot of movement to be happening in a single quarter.

Yeah. Okay. That’s helpful. And then, John, I know you said over the past two quarters here, it’s more about maximizing rate rather than speed to lease up on the Bed Bath. It sounds like you guys have really good traction. I mean, from a commencement perspective, maybe relative to where you thought quarters ago, kind of what do you think updated timing is given how much you have under LOI than the other 11 that are kind of in negotiations? What do you think the time frame is to get that revenue back up and running and then maybe also just run through how much of those are single tenant backfills versus maybe splitting the boxes?

Yeah. I mean I don’t think that the overall trajectory has changed much, Craig, in the sense that what we have experienced over the last several years. I mean, we have done, what, 60 something boxes over the last few years. Generally speaking, when you sign a lease, it’s going to take 12 months to 18 months for rent commencement and it’s going to depend on how much work you are doing in that space. So I know some people say it happens faster than that, but those are rare. It has to be an as-is deal and not a lot going on in terms of work. So I think we are still on that trajectory of as the leases get signed. It’s approximately in that 12-month period. And then I would say in terms of splits, right now, the majority of the conversations as they have been for the last two -- say, four quarters are tenants wanting to take the entire space or us requiring them to take the entire space more importantly. Now couple of instances where we may want to subdivide and for merchandising mix and that’s kind of what I meant by this is not a speed game. And so, but the splits are pretty rare, I mean, of the 63 deals we have done in the last, whatever a couple of years, we split one, which is kind of unbelievable and it goes back to the theme, open air is strong.

Okay. And then you guys got leverage down to 5 times. I mean, from a long-term perspective, kind of what’s the goal here, how much capital do you kind of keep dry here for potential opportunities, kind of thoughts on balance sheet management?

Yeah. Yeah. I mean, if Heath wants to talk about this too is good, but from my personal perspective, we are 5 times that it’s going to ebb and flow quarter-to-quarter a little bit, but not materially. So we are at the low end of our range that we have set out as a goal, which is pretty fabulous. We have delevered basically 1.5 turns since the merger. That’s another beautiful benefit of the fabulous deal that was done. And so we wanted to make the point that our balance sheet is one of the top two in the entire sector and that affords us this ability to continue to operate at a very high level, but also if an opportunity arises, then we are one of the few that probably can act upon that without any material issues with our balance sheet. So we love where the balance sheet is, it’s a very strong position and we want to continue to be in the low to mid-5s like we have been saying, and again, that affords us lots of optionality. Heath, do you want to...

Yeah. Okay. Good answers.

Did you want to add anything or?

No. Nothing else. Thanks.

I took the words out is mouth.

Word out of my mouth, correct.

It helps to increase a part of liquidity [ph].

One quick one. Heath, is there anything legacy RPAI related on swaps amortization that’s running through the numbers and if there is, kind of how long does that, what’s the tail on that until that burns off?

I’d have to look at our maturity schedule. I forgot which one of the RPAI debt instruments are swapped and how long they have run through. So I’d say, it’s nothing material running through it. I will tell you the one thing that’s continuing to run through the P&L, that’s a swap. As you recall, in 2021, we took out that forward, that was $150 million. That’s resulting in about a $3 million benefit every year to our interest expense. One thing about it, it’s a little lumpy. So you may have noticed there’s a sequential sort of increase in interest expense from the first quarter to the second quarter, because when we realized that $3 million, we realized half of it in the first quarter and half of it in the third quarter. So it gets a little lumpy, but nothing a call with those that you are thinking about, Craig. And again, we can offline take a look at when those things exactly mature, if you want me to quantify that for you further.

No. That’s helpful. Is there anything to call out sequentially in interest expense for Q2 to 3Q?

Again, other than in 3Q, you are going to see the benefit of that $1.5 million again, and then obviously, there’s a slight increase in SOFR based on recent moves by the Fed. So to the extent that we have a floating rate debt, we will see a small uptick, but nothing material quarter-over-quarter.

Great. Thanks everyone.

One moment for our next question. Our next question comes from Floris Van Dijkum with Compass Point. Your line is open.

Hey, guys. Thanks for taking my question. I guess, let me start with -- as you -- John, I mean, you sort of mentioned this in some of your comments as well, raising the long-term growth rate of the portfolio. And part of that, obviously, is through higher fixed rent bumps, particularly on the shop space and also how you changed the anchor bumps going forward? I think one of the other things that is, oftentimes overlooked is, your move to fixed CAM was probably one of the earliest in the shopping center space and we have seen this play out 20 years ago or 25 years ago in the mall space, where Simon and GGP were the sort of, in fact, I think, GGP was the first one to do it, but Simon followed shortly thereafter in terms of going to fixed CAM and Simon has stopped disclosing, because the profit margins are so large on that part of the business. Maybe could you give us a little bit of an update on how fixed CAM is going, what percentage of your portfolio is that and what kind of bumps are you getting in terms of escalators and how you see that enhancing your growth going forward?

Sure. And I guess, he brought the fixed CAM initiative from GGP. So we are thankful. But the reality is we are doing very well there. We have gotten back much quicker than we thought. When we did the merger, we were around 50% of the portfolio was fixed CAM and we are already back at 50% for the total portfolio. And as you know, RPAI had almost no fixed CAM at all. So it’s quite amazing how quickly we have gotten back, which shows you that our conversion ratio is in the 90% range. So look, the initiative is great. I guess it’s not for everybody. But for us, it’s been a really smart thing for us to do. There is -- when you look at our ratios, you look at our NOI margin, things like that, I think, that’s where it shows up, and obviously, has -- it has escalators. We don’t disclose those escalators, because that’s a competitive thing, but the reality is they are probably higher than those base rent escalators. So I think, look, Floris, in this business, with the way rollover works and the time associated with that coming online. This is all adding. But when you and all the deals we have done this year, right, and as I said in my prepared remarks, we are almost 100 basis points better than historical portfolio, right? So that just shows you that this is a movement in the right direction. I do think that it’s -- a lot of it is how we run the business, but it’s also a function of the strength of the platform in terms of open air retail and you have just got so many more retailers that are coming into the space, it drives that friction. So suffice to say, I do think it is a big part of what we are doing, obviously, reimbursements is a smaller percentage of our revenue, but it’s a material percentage.

And then as a -- maybe as a follow-up, you sold once of your potential mixed-use development site at Pan Am, I think at almost zero or very low cap rate obviously. Could you maybe update us on your thinking on some of these other mixed-use sites, in particular, maybe give us an update on what’s happening in Ontario, California with the former cinema box there, and then, I think, you extended the cinema short-term, but how is the entitlement process going and what are you thinking there? And then maybe has your thought process changed on what’s going to happen at Carillon going forward, the fact that there’s very little new developments and is there -- are there elements of that, in particular, in terms of retail that you would be very -- that you might be interested in?

Let me just give you a second and then I am going to have Tom give you the details. But in terms of Carillon, specifically, we have been pretty clear that when we laid out our strategy on the developments, the future developments, that we kind of looked at that quite differently than we did One Loudoun, for example, and that hasn’t changed. I think Carillon is great and it’s a great piece of real estate, but for us in terms of investing a lot of new capital, we are not looking to do that. We are looking to minimize the investment there and maximize the investment in One Loudoun. So thematically, that theme hasn’t changed, but I will let Tom give you more details.

Yeah. Then on Pan Am, and specifically, that was a deal that we ended up selling the property the City of Indianapolis. There was no question that the highest and best use for that property was a convention center expansion in a large hotel. So that part was very straightforward and easy for us. Then on Ontario, East of LA. We have a great 1,900 or 19-acre parcel. So we are in the process of working with the city and working on various concepts of repurposing that property zoning standpoint. So that is moving along nicely. So on all these, including Carillon, we are just taking a very measured approach doing the right thing, not forcing projects or developments that don’t make sense based upon the time periods of which we are in.

Did you want me to go ahead and move on to the next question?

Yeah. Sorry.

Yeah. Please.

Sure. Thanks, Floris.

One moment. Our next question comes from Alexander Goldfarb with Piper Sandler. Your line is open.

Hey. Good afternoon out there. So two questions. Heath, your bad debt assumptions, I think, you guys were pretty low in the first half. I think it was 45 bps or something like that, it was pretty low. Back half your budgeting 125 basis points. You already know about Bed Bath and parties of the AMC, all the known ones. So my question is really, and you are not alone, a number of the peers are being cautious on bad debt. Are there truly concerning tenants out there or is this just sort of you and other teams just trying to be conservative to, based on historic, like, just trying to get a sense, because it doesn’t seem like from the headlines that there are big tenants that are pending out there, but maybe there’s stuff that’s burbling below the surface that we don’t know about. So just looking for a bit more perspective?

No. Alex, I think, the 125-basis-point assumption is really rooted in history, looking back, typically, we run between 75 basis points and 100 basis points of revenues as a typical year of bad debt. And then laying on top of it that we are in a strange environment and there’s no question that the economy and the macro environment is full of uncertainties. So there isn’t this a cold list I have in my pocket, Alex, where I am saying, well, I better make sure I have enough bad debt to cover in case XY

Okay. And then the second question is on the apartment front, just maybe a bit more color, especially as the environment steadily improves and maybe we can get back to some sort of transaction normalcy. Are you guys -- the apartment initiative, is this like converting parking fields, is this like behind shopping centers, is this adding second or third floors or are you guys buying adjacent land to existing centers to put apartments. Just a bit more perspective and I think, John, you said you would bring JV partners to sort of run these deals and help do everything. So just a bit more color.

Sure. Yeah I mean, I think, it was everything except the last bullet. We are not like actively out looking for land adjacent to acquire. Generally speaking, we already own the land. So, yes, I mean, we have done a little bit of everything that you mentioned there, Alex, and it’s been interesting, because sometimes we have contributed a parking lot and taking, say, a 15% equity interest vis-à-vis the value of the land and then sometimes, we have contributed capital. So it’s a little bit of everything, but we have generally not look to do it solely ourselves, obviously, we have been learning the business over the last several years pretty significantly. That said, I think, at this point, we believe having some sort of operating partner whether depending on what percentage they might own is really going to be dependent on the deal. But the point we are making is that this potential stream of revenue is growing and we own the kind of quality real estate where people want to add multifamily, right? So it’s a nice complement to the primary business. It generally has a higher growth profile. But again, it’s -- we are going to be very measured in how we go about it as we have been to-date. But the reason I mentioned it is, probably, a lot of people don’t really think of that, that we have already amassed an equity interest or ownership interest in almost 2,000 units and we have 5,000 units that are entitled. I mean so we have a substantial kind of ability to continue to grow that part of the business, but we will do it in a measured way. By the way, that’s why our leverage is 5 times, right? We are measured. We are thoughtful.

And then, John, but to that point, the 1,700 units, those are -- are those all operating right now or those are what you have under control that you could build?

Yeah.

That is…

No. No. No. No. I am sorry. Those are operating and then we have how many of those are under construction.

Yeah. So we basically have four or five opportunities that are out there and one number that you may have gotten confused with is just at One Loudoun, we have 1,745 units through the zoning process that we would be able to develop. So if you look at what we have under construction right now, it is The Corner project, that is 285 multifamily units and the first occupancy of that will begin just towards the end of this year. But there is there’s an inventory of opportunities for us will be very measured. We will make determination when the right times are. But it’s good to have that entitled land inside our future opportunity list.

Thank you.

One moment for our next question. Our next question comes from Anthony Powell with Barclays. Your line is open.

Hi. Good afternoon. You put a new slide in your deck with delivery to the [inaudible] growth versus the total lease rate, which is very positive for you. That said, it suggests to me that at some point, people will want to put more money into the space and actually construct retail centers. So how far are we away from that, is there a risk that in the next new easier money time that we have that people start to build more retail centers given the strong economics and results we see?

Anthony, hi. This is Heath. I will start and let John add on later. So I still think the environment is such that we are going to be in a continued low supply environment or low new supply environment. I mean, really, if you look at what construction costs are versus what you can buy an existing center for, especially in the existing center where you may have some redevelopment plan where you can maybe even get it below replacement cost value. So I think, structurally, things are still looking good for us in terms of what new supply is going to look like on a go-forward basis. And we are certainly not looking for raw parcels to do any greenfield construction ourselves, obviously, we have got a lot of wood to chop on our existing projects for densification and multi-use or redevelopment of some of our projects as well. So again, us, personally, we are not -- it’s not one of our sort of capital allocation levers we plan on pulling and I think everyone else is looking at the same way. I think economically, it’s probably better to acquire at this point than it is to build new supply. But I will let John.

No. I mean, Heath said it perfectly, Anthony. I just don’t think that there is enough yield in a ground up deal and you also have to remember, a ground up deal generally would take you three years minimum to get to revenue. I mean, probably five, if you are really getting into finding the land and going through the entitlement process stuff where you would want to own it. So I mean, it’s one of many reasons, but I just -- at this point, it just does not feel like there’s a push towards new development, and candidly, you still -- we are still working through an overbuild from the previous decade, right? So as you work through that overbuild, it becomes -- this is why it’s a better business today. I mean there’s 100 reasons why, but this is one of the very, very strong primary reasons is a better business and I don’t see that changing at any time. And when you look at the deals that we do occasionally, we generally already own the land and our returns are well above what we would be otherwise getting. That’s why we do the deals. In landing and tradition as an example of that.

Got it. Thanks. And going on to other capital allocation, some of your peers have either announced deals or room turn now feels or as well talking about seeing new deals come back to them this morning. What are you seeing out there? I mean I know that our priority is in leasing, but any just so you start to ramp up the exactly some pipeline given the environment?

No. I mean, I think, that the acquisition environment is still tepid. That being said, there’s no question that there appears to be maybe even in the last six weeks more product coming to market. It continues to come to market as individual centers. There’s a couple of larger portfolios that would have been no interest to us. So we are actively involved in reviewing opportunities. As I mentioned, we have one of the top two balance sheets in the entire sector. So if we want to do something we can. But we are very, very selective right now. We have plenty to do. And so I think I don’t know about in terms of things coming back to market. I mean, I guess, if deals were pulled at some point in time, they are probably coming back around, it’s just new packaging, it’s the same deal, right? So, for us, we are really more focused on, if we are doing acquisitions, we are generally pairing that trade with a disposition. So right now, that’s kind of where we are, which is why Heath said, we are looking at that impact to be neutral. But again, we are early. I mean, it’s -- we have a whole another half a year, a lot can happen.

Great. Thank you.

Thank you.

Welcome.

That’s it for me.

One moment for our next question. Next question comes from Lizzy Doykan from Bank of America. Your line is open.

Hi, everyone. Apologies if I missed it. I just wanted to see if you could give more color on the decline in small shop occupancy. It seems to drop a bit more than the dip we saw even last quarter?

Sure. I mean, it’s pretty simple. It’s really, the majority of it, I mean, there’s a small part of it. I think it was really Craig, but really, the majority of it is actually us accelerating recapturing space, probably, 75% of the drop, where we had an opportunity to move tenants out if they are in default. And in this kind of environment where we are getting the annual rent bumps that we are getting and the quality of tenants we are getting, I think, we are moving very quickly to enact that pricing power. So there’s really -- that’s really it. I mean it’s really more something that we want and we will continue to want to get our hands on.

Yeah. I will just add, if you recall, our small shop lease rate was the highest in the sector at 92.5%. So really where we are sitting now, we are just viewing this as a tremendous opportunity. As John said before, we have got leases and it takes a long time to effectuate change. So we can recapture faster and get a better tenant with better rent in we are going to do it. So that’s what’s happening.

Yeah. That 92.5% was pre-COVID and so there’s no reason to believe we won’t march back to that, but it obviously takes time. But I think it speak the more important thing here is, the theme is, if we can get space, we want space, that’s the theme.

Okay. Thanks. That’s helpful. And then I noticed you have a good outlay on page 15 of the deck on just your anchor inventory opportunity. And I just -- I was curious on the 17% spread that’s expected on what’s left. And just compared with the 26% spread that’s been executed is the lower percentage there, just a function of what’s been executed last quarter or is there anything to comment on there in terms of the expectations around rent growth?

No. This is certainly not a sign that we are decelerating a simple math. It’s just basically taking our average in-place rents and calculating the spread that way. As you can see, we are trying to be conservative and saying, well, we at least got our average rents in place, we would have a 17% spread, obviously, with the column to the left, you can see that we are doing much better than that. So we anticipate being able to outperform that, but for this presentation here, we are trying to be conservative and you will see footnote four, we will give you an explanation of that number.

Our leasing team asked the exact same question. Why isn’t that lower? We don’t expect that to be the case.

Okay. Thanks everyone.

One moment for our next question. Our next question comes from Michael Mueller with JPMorgan. Your line is open.

Yeah. Hi. Just two quick ones. First of all, when you talked about the 2.4% bumps on Q2 activity, was that all in or was that just excluding option renewals? And then the second question is, are you just seeing any demand differences when it comes to the various product types like lifestyle versus community neighborhood or geography?

Yeah. First of all, it excludes options. So that’s new leases. And I am sorry, Mike, what is the second part?

Yeah. Just any demand differences you are seeing across the product types, basically?

Really, I mean, that’s one of the benefits of our portfolio and the different product types that we have. There’s been such cross-pollinization of retailers wanting to be in these kind of three major food groups as we broke out in the investor deck, community neighborhood, mixed-use lifestyle and power. So -- and there has really been no real differential there. And from a geography perspective, I mean, the geographies that we are in are very strong, so we are benefiting from that. I mean as you know, 40% of our -- almost 40% of our revenue comes from Texas and Florida, which I think is the highest in the space of those two states. So that has afforded us a lot of opportunities, because those are two very important growing markets for retailers. But by the same token, I mean, it’s very broad-based, and I think we made the point in the remarks that, when you get to this kind of friction point when supply has dropped so much over the last few years and demand has gone up a lot. I mean that’s what’s driving that increase.

Got it. Okay. Thank you.

Thank you.

Thanks, Mike.

One moment for our next question. Our next question comes from Lisa Tsai (sic) [Linda] with Jefferies. Your line is open.

Hi. It’s Linda. In terms of the success in achieving fixed rent bumps, it sounds like those tenants are comfortable with our occupancy cost ratios. How do you think about the opportunity to increase occupancy cost ratios and which tenant types have better capacity when you look at your portfolio composition?

Sure, Linda. Very good question. I think that’s, again, kind of back to my theme on open air. I mean, one of the beauties of this platform is that the occupancy cost is low on a relative basis, when you are comparing to other types of retail and especially when you are comparing to online only, the acquisition cost of the customers is crazy. So I think the drive here is that, when you look at the total portfolio, we have historically been high single-digit occupancy cost kind of and you compare that to high teens. I mean, you can see that in other platforms. You can see that, that is a real driver in their ability to continue to pay rent bumps. But by the same token, we have to make great selections about who the retailers are, which is why we mentioned that it’s never a foot race. You are never -- you are always looking to thread that needle between the merchandising mix, the retailer’s ability to perform and the cost to occupy. So right now, that is a very good kind of -- we are in a very good sweet spot as it relates to all those.

And we will see some fluctuations simply through geographics of different areas that high -- have higher wage scales and maybe a little more difficult supply chain concept. But I think, all in all, we are doing a very good job watching that ratio, wanting our customer to be as healthy as possible. So it’s a big focus around here.

Are there certain tenant types that have better capacity or does it relate back to kind of just wage gains and sales of a particular region?

Yeah. No. I don’t think there’s a -- you can really pick a particular type of retailer. It comes down to the individual store and how it performs and they could be very different across even the same brand, right? This is why real estate is so important. I mean you have heard us talk so many times about, we focus on the dirt. We focus on the quality of the real estate. What’s on top of it is fungible. So as long as we own very high quality real estate then we should be able to produce, or I should say, our customers should be able to produce results that allow it to continue to prosper and for us to prosper. I mean it’s a partnership and we are pretty good at managing that partnership.

And then in terms of payback periods on anchors and small shops given the demand for space and some commodity costs coming down, do you expect payback periods to shorten?

I mean, yes, we are seeing them shorten in general and they generally are less than three years when you look at the total portfolio. But it really depends on the individual deal, Linda, as you know. And that’s why we focus on return on capital a lot more than spreads, even though we are getting great spreads and we talk about it, especially when you look at our GAAP spreads, right? And that’s where our rent growth comes into play. But bottomline is, our job is to be very good fiduciaries with our investor capital and so we are much more focused on getting that -- those high returns, which we have been doing.

Thanks.

Thank you.

One moment for our next question. Our next question comes from Dori Kesten with Wells Fargo. Your line is open.

Thanks. Good morning. How do you expect CapEx spend to trend over the next 12 months to 18 months, I guess, including and excluding the cost to get the old Bed Bath spaces back online?

So excluding the cost, again, Bed Bath space is done. Over the next 18 months, it’s upwards of $200 million and so if you look at the total of Bed Bath inventory and what that might cost, it’s probably somewhere in the neighborhood of between $40 million and $50 million additional to get those leased up as well. And that you will see -- you will see that spend probably later part of 2024 into 2025. So, again, we have got significant CapEx spend. We have got a significant sign out open pipeline. So it’s going to be elevated over the next, call it, two years.

But we do see construction costs, in general, stabilizing, and I think, we will be able to see some more movement in that as general contractors, construction managers begin to start pushing some of those savings down. So we feel like we are in a much more stable area as we tackle some of these costs.

Okay. Thank you.

One moment for our next question. Our next question comes from Wesley Golladay with Baird. Your line is open.

Hey, everyone. Just curious which markets have the best pricing power and is there any region that is materially separating?

Hey, Wes. We were talking about that a bit earlier. Right now it’s pretty well balanced and there is not one market that we see that is way outpacing another in terms of pricing power. I mean, obviously, some markets have higher embedded rent than others just because of the history of the market like in the New York region, for example, but in terms of growth, it’s very -- our ability to drive annual growth is widespread. And look, there’s been a significant suburbanization over the last couple of years and we have been a big beneficiary of that and that appears to be pretty solid like not fading. But that said, also, when you look at our gateway markets like Seattle or the New -- as I said, New York, Chicago, et cetera, those are growing as well. So, I mean, there’s a pretty strong bid out there for this type of retail, it’s just pretty basic.

Okay. And then I think earlier in the prepared remarks, you mentioned the fees would step down for Hamilton Cross or fees because, okay, you stopped the development at Hamilton Crossing, can you quantify that? And then as we look to next year, is there anything noticeable when it comes to that mark-to-market debt amortization for interest expense?

Yeah. So the first part, the deceleration of the fees, it’s about $1 million back half of the year less than it was in the first half of the year. So, again, that project, the first phase of Hamilton Crossing is winding down. So those fees are going to be ending soon. However, there is a potential for future phases there. So you may see some more development fees turn on, maybe before the end of the year and into 2024. So, hopefully, that would be something that we can repeat going to 2024. And then in terms of the -- was the second part of your question was that the debt amortization? Next year…

Yeah. The mark-to-market gain?

Yeah. The -- and the mark-to-market gains, we will probably see a decline of, I will call it, $0.02 around $4 million into 2024 as those maturities hit.

Okay. Thanks for that.

One moment for our next question. Our next question comes from Paulina Rojas Schmidt with Green Street. Your line is open.

Hello, everyone. And so we have not heard about mall tenants looking to migrate to the open air space some of them and you also highlighted in your presentation. Two questions. Is this migration mainly taking place at your lifestyle centers or you are also seeing it across other property types? The second one is, have you seen this trend accelerate or is it progressing at a steady pace?

Hey, Paulina. So macro, and Tom should comment, obviously, but macro, it’s this trend, I don’t know if trends the right word. I mean it’s really just the fact that there’s less retail space, the open air retail segment is very cost effective. So you are finding retailers really not delineate as much as they once did in these different product types. So I do think, thematically, it’s important to understand. I think it’s more than a trend. I just think it’s the business. The business has changed and these retailers have realized again, and Tom can give detail, the retailers have realized their profitability in the open air sector is significant and that’s why they want to grow the platform quickly. But Tom can give you a little more detail.

Yeah. Paulina, I think, it really comes down to one major factor and that is convenience. And I think as people become more and more busy in their lives with the various things that pull on the convenience is critical that you can pull up to an open air shopping center, get out of your car immediately ingress into a store and then cross shop as well. And then in addition to that, you are able to get shops maybe 2 times or 3 times a week, where if you were in an enclosed situation, that may be just one event a week. And then with our expense structure, these numbers start to overwhelm some of these retailers saying, we have to diversify, but it doesn’t mean that they are leaving their primary A locations and shopping centers. It just means they need to touch a different shopper in a more convenient atmosphere. So we are seeing great strength, and like John said, this is just an evolution that is very consistent. And we are even seeing some groups like maybe a Sephora that’s even leaning out maybe beyond the higher open air shopping center into more of a power or more productive center like that. So I think we will see these tentacles continue to expand over the next couple of years, which has obviously been a big help to the open air industry.

Thank you. That’s helpful. And another short one, so other income has been a positive forcing property NOI growth. I believe this is structuring the overage rent you mentioned. Can you touch on what retailer categories driving this growth and if you expect the full year contribution to be in line with what we see year-to-date?

We are seeing that overage rent over a broader array of tenants. So it’s not really one particular tenant type. We are tenants that are paying us percentage that never paid us percentage rent at all. We have a furniture retailer that is paying us just amount of overdraft we never thought was possible. So it’s really been extremely broad, it’s restaurants, it’s the discounters, grocery stores. So you name it, we are seeing it everywhere and that we are experiencing the highest levels, we are even seeing in theaters. We experienced the highest level of overage rent we have ever experienced in the company. So we expect that trend to continue.

And I am not showing any further questions at this time. I’d like to turn the call back over to John Kite for any closing remarks.

Well, I just wanted to say, again, thank you all for taking the time to join us today and thank you for having an interest in KRG. Have a great day.