Good day, ladies and gentlemen, and welcome to the Q1 2019 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Bryan McCarthy, Senior Vice President of Marketing and Communications. You may begin..

Thank you, and good morning, everyone. Welcome to Kite Realty Group's First Quarter Earnings Call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements.

For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 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, Chief Financial Officer, Heath Fear; Executive Vice President, Portfolio Management, Wade Achenbach; Senior Vice President, Chief Accounting Officer, Dave Buell; and our newest member of the team, Senior Vice President, Capital Markets and Investor Relations, Jason Colton.

I will now turn the call over to John..

Thanks, Bryan. Good morning, everyone. During the past quarter, we continued to execute on our disposition plan while maintaining our focus on operational excellence. A brief summary before we touch on some of the highlights for the first quarter. We generated FFO of $38.2 million or $0.44 per share.

We grew same-property NOI by 1.8% compared to last year driven primarily by increases in base rent and net recoveries. We grew our ABR to $17.16 per square foot, which is an all-time high for KRG.

We executed 95 new and renewal leases for over 640,000 square feet, a 30% increase in leasing volume as compared to last quarter and a 50% increase as compared to the first quarter of 2018. We made very good progress with our Box program, signing six leases in the first quarter, representing approximately 200,000 square feet.

This compares to two in 2017 and 12 for 2018. This is a testament to the volume of tenant demand, the quality of our assets and the productivity of our leasing team. As a result of the success of our Big Box Surge program, our retail anchor leased rate stands at 96.7%, a 50 basis point increase sequentially.

Our retail small shop leased rate is 91.6%, a 40 basis point sequential increase and an all-time high for KRG. Our total portfolio economic occupancy is currently 92%, which is a 300 basis point spread to our leased percentage.

The spread equates to approximately $9 million of NOI that will come online over the next 18 months, with over $6.5 million attributable to the success of the Big Box Surge program. It's important to note that we anticipated some disruption in our spreads as a result of our desire to drive occupancy in our disposition pool.

In addition, we proactively restructured deals with two of our watchlist tenants. Excluding these combined impacts, blended re-leasing spreads were 17.6% on a GAAP basis and 12.4% on a cash basis. Please note that the impact of the restructured deals is factored into our guidance. Moving on to transactions.

During the quarter, we sold one asset for $13.5 million, and subsequent to quarter end, we sold an additional four assets for $121 million. The proceeds from these sales were used to primarily pay down debt. Additionally, we have another $189 million of assets under contract, one of which was put under contract late yesterday.

That's $324 million of asset sales completed or under contract. We feel very good about our ability to meet our 2019 disposition guidance range. As anticipated, our net debt-to-EBITDA ratio temporarily ticked up this quarter.

Pro forma for the completed asset sales and debt pay-downs subsequent to quarter end, KRG's net debt-to-EBITDA is currently 6.6x. As previously guided, we expect our NDE ratio to be below 6x, assuming we hit the high end of the disposition range. I also wanted to point out some updates to our supplement.

We've made it cleaner while providing all the relative information. We've also highlighted some of the geography and balance sheet changes associated with the new lease accounting standards. In addition, we now classify assets into four regions, matching those of the Census Bureau, with the South being our largest region with nearly 60% of our ABR.

We trust you'll find these changes helpful. Regarding guidance, we are reconfirming both the 2019 FFO guidance range of $1.66 to $1.76 per share and the underlying assumptions. Our team is staying focused on our 2019 plan, both in dispositions and most importantly, in operations.

We had a great first quarter and plan to continue this success through the rest of the year. Thanks for joining the call. And operator, we are ready for questions..

[Operator Instructions] And our first question is from Christy McElroy from Citi. Your line is now open..

Hi, good morning, everyone..

Good morning..

Just wanted to follow-up on the spreads, the re-leasing spreads in the quarter. Maybe some color on the negative renewal spreads in Q1.

Understanding it's lumpy from quarter to quarter but with the trailing 12-month averaging around 3%, sort of how should we expect that to trend? And just wondering if the Q1 activity is related to any specific tenant..

Sure, Christy.

Well, first of all, as I tried to say in the prepared remarks, this quarter, in particular, in the sense that we had – that we're positioning a lot of these dispo properties to get ready to sell and trying to maximize value on the dispo properties, we had a few instances of renewing some anchor leases that we probably otherwise wouldn't have done on long-term hold assets.

That was a pretty big part of it. So in terms of that going forward, I mean, there will be some lumpiness to some of these spreads going forward in terms of the ones that are in the dispo pool because we're trying to maximize the value, and it's not – these aren't – these are more decisions that are made in that regard.

And then also, as we mentioned, a couple of tenants that we restructured leases with, we also did that, and that kind of reflects, actually, both – some of those are ongoing in assets that we're holding, but we're very specific to the couple of tenants that we did that with. But basically, half of those were also in the dispo pool.

So if you are summarizing, it's mostly focused on disposition assets. Color as it relates to where we sit today, the first month of the second quarter was more back on track, but I do want people to understand that some of this will be lumpy and particularly based on the size of our pool.

So I don't really think it's indicative of what we're doing in the overall portfolio, but there were these instances. And based on the square footages when you're doing these anchor deals, that's pretty impactful.

Heath, do you want to add to that?.

No. I think you've captured it well..

Okay. All right. Great..

And then just with the garage piece bought, maybe you could provide an update on the Pan Am project plans for ultimate capital outlay, ownership interest, potential monetization.

And will you still be the master developer of this site ultimately?.

Yes. I think first of all, as it relates to the garage, all along, our intention was to control this whole site to maximize the value of the land. We were able to acquire the land several years ago at an extreme below-market price due to the fact that the garage was in a separate ownership parcel.

So we always knew that in order to maximize value, we would need to do that, and we did that. That was always kind of our intention. Overall, big picture, this is a complicated large project that continues to move forward in the sense of us pursuing the project and, again, always trying to maximize the total value of our investment.

It's too early to say what all the dynamics of that will be as it relates to ownership percentages, et cetera. I think in terms of the master developer, that clearly is our intention, to be the master developer of this project and then to continue to push this project forward for all of its associated approvals and incentive packages, et cetera.

So a little early to get further than that, but this was always part of our plan. And it, frankly, makes the entire parcel much more valuable..

And Christy, it's also worth noting that the Pan Am project was in our original guidance. So in terms of our net debt-to-EBITDA goals, that was contemplated..

Okay. Thank you..

Thank you..

Thank you. Our next question is from Todd Thomas from KeyBanc. Your line is now open..

Hi, thanks, good morning.

John, you talked about the 300 basis point spread between the lease and occupancy rate, and you previously talked about same-store NOI growth kind of ramping, sort of the magnitude of that ramp and, in that context, maybe how that compares to what we should expect in the second quarter with any sort of closures or potential move-outs that have occurred..

Yes, Todd. I think you faded out a little bit, but I think you were saying what do we expect the year to be, the remainder of the year, in same-store NOI and the ramp-up. And I think as we've been talking about, the back half of the year is where we're going to see – we anticipate that we would see the increases more third and fourth quarter.

I think second quarter could continue to be a little bit on the lower end, particularly as it relates to comparables with Toys "R" Us, et cetera. So I think it continues on the path that we have budgeted, which is more of a third and fourth quarter ramp-up. But again, we're also leaving room for any unanticipated fallout. Heath, do you want to....

Yes. No, so the first quarter, we actually did a little bit better than we modeled because we had a – we didn't model any Payless rent, and they continue to pay rent. We didn't model any rent from one of the Frank's locations, and they continue to pay us some recoveries and some percentage rent.

And you may have noticed that our expenses were a little lighter in the first quarter. So we anticipate, again, that will sort of moderate into the second quarter and then ramping up into the third and fourth quarter..

Okay. And in terms of occupancy, so small shop increased in the quarter.

Will we continue to see small shop occupancy rise into the second quarter? Or are you expecting occupancy to dip a little bit next quarter before ramping up later in the year?.

I think our goal is to continue to push small shop leased percentage. I mean if you remember when long ago, we were trying to reach 90%. We continue to push that. It continues to be an environment where our shops are attractive to retailers. And if you look at the kind of the balance, the mixture, we feel pretty good about it.

That said, small shops are very much – kind of run in line with where the overall economic environment is, and that's been strong. So if that continues, we will continue to push that hard. It's an important part of the mixture and especially the merchandising mix for us.

So yes, I think the answer is we don't anticipate any major moves back or – backwards or forwards. We anticipate more incremental moves as when you get up to 92% basically, you're pushing pretty full occupancy. And we also always like to have some options available at our properties for interesting new tenants, so there's a balance there..

Okay. Great. All right, thank you..

Thank you..

Thank you. Our next question is from Craig Schmidt from Bank of America. Your line is now open..

Thank you.

Given the pace of dispositions to date, is there any potential that you might raise the target?.

Craig, I think what we're doing is we're trying to have enough properties in the market to hit our goals, and so it's really going to be dependent upon the pricing that we're receiving. We want to be in a position to only accept what we believe are fair value prices.

So we're always going to have a little more than the goal in the market to kind of test that. But again, I think it's possible that we would do that, but our real goal is to hit the top end of that range.

And if we were to go over that, either through other non-core sales or potentially joint venture activity, then that capital, as we've said before, would more likely be used in an offensive way rather than just straight de-leveraging because we want to – we think that if we can hit the top end of the dispo range, that we get that leverage in that high 5x, and then natural EBITDA growth, we'll get it down even below that.

So we'll be in a very good position to try to do things more offensively if we were in that position..

And if the dispositions are more front end-loaded, might that raise some of the drag impact on your guidance?.

Yes, it's kind of that situation, Craig, that if we outperform our disposition plans, we will underperform our FFO. So as of right now, we are still modeling August as our average disposition date. But listen, to the extent we can get these things done faster than that, we will.

Will it be more dilutive in 2019? Yes, but then year-over-year, it'll be less dilutive. So we're happy to have it done as quickly as possible..

Great.

And then last thing, on the small shop increases, are those more regional, national or local tenants?.

Tom, do you want to....

Yes. These tenants would mostly be more local tenants. And what we really like about the tenant base is it's very diverse, Craig, just in terms of the type of uses, whether that be medical, fitness, just various services. So we've seen a nice mix, but for the most part, mostly local..

I think, Craig, also, a lot of those are local in the sense of ownership. Some of them are national franchise deals. So you see us doing a lot of the national franchise deals who are – which the owner of the franchise is usually a local player that has multiple locations.

So you can see the names that would be national names but owned locally and then supported with a marketing budget. So that's a nice thing, too.

So I think the balance, when you look at the tenants that we've opened, I mean, more specifically, when you look at all of our openings in the quarter, basically, 70% of our openings were restaurant, entertainment, grocery and service. So we continue to be very experiential in our openings and necessity-based. So that's what's most important to us..

Great. Thank you..

Thank you..

Thank you. [Operator Instructions] And our next question is from R.J. Milligan from Baird..

Hey, good morning, guys..

Good morning..

I was curious if you could give a little bit of color on the buyers of the assets that you guys have already sold or have under contract..

Sure. It's pretty diverse, R.J., which is positive. Of the five deals that we've sold, I'd say a couple of them would be institutional-type buyers. I'd say a couple of them were kind of more local with institutional backing and then also 1031. So I think that the – I know that's a question that a lot of people have is what is the depth of this.

We were definitely surprised by the number of real offers, the depth of that and our ability to have that leverage in the sense of pricing. So I think that's been a positive. Assuming that the overall conditions remain the same, I would think that, that'll continue and maybe even accelerate as we move through the year and people deploy capital..

And maybe you could talk about what those buyers are looking for when they're looking at buying those assets. Is it that they see value-add opportunities? Is it that they're looking for stability versus you guys looking for growth? What seems to be the driver of that buying – purchase....

I think it's – yes, I think it's all of the above. I think we had a couple of buyers who are very, very interested in just stability and knowing that their yield is fairly well locked in. We had a situation where one – more of a local player is thinking more long term in the sense of some value-add play.

So I think it's – that's the nice thing, is you've got people with different objectives seeking these properties that, again, generally drives up price.

Whereas we believe, for us, that these particular properties, while they may be stable and produce stable results, are not going to grow the way we want to grow our NOI, are probably going to take more capital per square foot than some of our other properties and, in terms of the demography, don't really match what we're looking to do.

As an example, I think the ABR in the portfolio – in the five that we sold was below $14, and the NOI growth was definitely below where our objectives are. So it's what we thought it would be in that regard..

Okay. That's helpful. And I guess one last one for Heath. If you hit the top end of the disposition guidance, you said that pro forma, you're going to be below 6x debt-to-EBITDA.

And I'm just curious, and this sort of lends itself to Craig's question, if you are a little bit more opportunistic in terms of dispositions, what's the long-term leverage level that you'd like to run the balance sheet at over the next several years? Is it 6 – just under 6? Or is it closer to 5.5? What's the target?.

Yes. As an anchoring principle, somewhere between 5.5 and high 5s. And based on what you're doing, your development activity, your disposition and acquisition activity, you'll float above and below it. But sort of mid to high 5s, I think, is an area we'd be comfortable on a long-term basis..

Great. That’s helpful. Thanks guys..

Thank you..

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to John Kite, Chairman and CEO, for closing remarks..

Okay. Well, thank you, everyone, for joining us, and we look forward to seeing everyone soon..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect..