Kite Realty Group Trust 2026 Q2 Earnings Call

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 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, 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. Given the number of participants on the call, we ask that you limit yourself to one question and one follow-up. If you have additional questions, we ask that you please rejoin the queue. I'll now turn the call to John.

All right. Thanks, Bryan. Hello, everyone, thanks for joining us today. Halfway through 2026, KRG's tenant demand remains healthy. Our signed, not open pipeline remains elevated, the fundamentals underpinning our portfolio have never been more durable. The financial strength and flexibility we created has become one of our most valuable strategic assets. Over the past 18 months, our capital allocation initiatives, collectively referred to internally as Project Elevate, have focused on pruning lower growth, non-core assets to enhance the quality, growth profile, and resilience of our portfolio and cash flows. We have redeployed the resulting capital into higher conviction opportunities that offer the most attractive risk-adjusted returns, while also investing meaningfully in our organization through strategic additions across the platform, all aimed at improving our long-term growth. Since the start of 2025, we've sold 22 non-core assets for nearly $1 billion.

With each disposition, we reduced our exposure to lower growth formats and at-risk anchors while concentrating the portfolio in grocery-anchored lifestyle and mixed-use assets. As detailed on page six of our investor presentation, we've grown our weighted ABR in lifestyle, mixed-use, and neighborhood centers by 900 basis points since the start of 2023, matched by a 900 basis point reduction in power and large format community centers during the same period. Our portfolio enhancement is reflected in our tenant base, which we have strengthened from both ends. Our top tenant roster is increasingly concentrated in durable high-credit operators. Grocers now represent a third of our top 15 tenant list. Just as telling, four watch list tenants have rolled off our top 25 list entirely.

By virtue of the dispositions related to Project Elevate, we eliminated 58 at-risk tenants locations representing over 1 million square feet and more than 200 basis points of ABR. Tenants like these carry a cost on both sides of the ledger. They put the consistency of our earnings at risk, and each one is a potential claim on our capital. We've been equally disciplined about where we put our capital to use. During the quarter, we acquired two high-quality neighborhood centers, Founders Square in Naples and Chastain Market, a Trader Joe's anchor center in Atlanta, for $136 million through 1031 exchanges. That brings our acquisition since the start of 2025 to approximately $612 million, all of it recycled into faster-growing assets.

When our stock trades at a discount to net asset value, buying it back is among the most accretive uses of capital available to us. We acted decisively during the quarter, purchasing approximately 2.8 million common shares at an average price of $27.48 per share for approximately $75 million. Across 2025 and 2026, we have now repurchased 19.6 million shares for approximately $475 million at an average price of $24.20, well inside consensus NAV. Our reshaped portfolio is performing. Same-property NOI grew 3.7% in the second quarter. We executed 128 new and renewal leases totaling approximately 1 million square feet with blended cash spreads of 15.9%, including 28.4% on comparable new leases. Our lease rate reached 94.8%, up 150 basis points year-over-year, led by a 210 basis point improvement in our anchor lease rate. AVR per square foot climbed to $23.41, up 2.3% sequentially and 6.3% year-over-year.

Our embedded rent growth climbed to 185 basis points, up nearly 30 basis points since the start of 2024. Our signed non-open pipeline increased to approximately $37 million of NOI, representing a 350 basis point spread between our leased and occupied rates. We also continue to unlock embedded value across our mixed-use platform. This quarter, we commenced the second phase of luxury multifamily at One Loudoun, a 429-unit development within our existing residential joint venture that will begin delivering in 2029, the latest example of the self-funding growth built into our portfolio. Given the strength of the first half, we're raising our full year same property NOI guidance by 50 basis points at the midpoint to a range of 3%-4%. We are maintaining our FFO guidance as we prioritize flexibility and optionality over the immediate redeployment of proceeds generated through Project Elevate.

In the near term, our focus is on further strengthening and fortifying our balance sheet, reducing leverage, enhancing liquidity, and maintaining dry powder for attractive investment opportunities. While the heavy lifting on Project Elevate is behind us, we still have some work to do. Our guidance continues to assume a meaningful amount of gross transactional activity remaining in 2026, split between the sale of non-core assets associated with tax losses and 1031 acquisitions, which Heath will detail in a moment. Simply put, KRG has never been in a stronger position. We have a higher quality portfolio, a more durable growth profile, and one of the best balance sheets in the business, and a team that executes with discipline and urgency. I want to thank the entire KRG team for getting us here and having the energy and conviction it takes to keep raising the bar. Turn it over to Heath.

Thank you, and good afternoon. Coming off an extraordinarily active quarter, KRG is on plan and operating from a position of strength. We generated $0.52 of core FFO per share and $0.53 of Nareit FFO per share in the second quarter. Our same property NOI meaningfully outperformed our internal estimates in the first half of 2026, growing 3.7% in the second quarter and year-to-date. The outperformance was broad-based across better tenant retention, lower bad debt, higher overage rent, and stronger net recoveries. At the same time, we are maintaining our full year core FFO and Nareit FFO guidance of $2.06-$2.12 per share. This guidance assumes a 2026 same property NOI growth range of 3%-4%, which is a 50 basis point increase at the midpoint and reflects our year-to-date outperformance.

We are assuming a bad debt reserve of 90 basis points of total revenues at the midpoint. As a reminder, our 90 basis point bad debt assumption applies to the full year and reflects a blend of actual bad debt incurred during the first half of the year and an assumed bad debt rate of 100 basis points of revenue for the second half of the year. We are further assuming interest expense, net of interest income, excluding unconsolidated joint ventures of $114.7 million at the midpoint. The nearly $7 million sequential decline is largely attributable to two factors: higher interest income generated from Project Elevate proceeds being held in 1031 accounts, and the deconsolidation of our One Loudoun residential joint venture, which I'll address in a moment.

As for the remaining transactional activity in 2026, we are assuming approximately $225 million of non-core tax law sale assets and $110 million of 1031 acquisitions. When considering core FFO guidance in the context of our accelerating same property assumptions, it's important to refer to page five of our investor deck. On the quarter-over-quarter FFO bridge, you'll see a two penny drag in the line labeled Change in Our Transaction Activity and Assumptions. That line item reflects our decision to capitalize on a constructive transaction environment by expanding Project Elevate to the second portfolio sale that occurred in the second quarter, while also pursuing the sale of additional tax loss assets. It's worth taking a step back to consider the context.

Project Elevate contemplates recycling roughly 14% of our enterprise value, resulting in a platform transformation into upgraded portfolio quality and improve the durability of our cash flow while maintaining our fortress balance sheet and having remarkably little impact to our earnings. This is only made possible by our disciplined sources and uses capital allocation strategy. More specifically, since the start of 2025, we have generated approximately $1.1 billion of proceeds, including approximately $973 million from non-core dispositions and approximately $112 million from the sale of a 48% interest in three of our operating assets. We currently expect an additional $225 million of non-core tax law sales, which will bring total proceeds to approximately $1.3 billion. Against those sources, we have been disciplined and opportunistic with uses of capital.

Since the start of 2025, we have repurchased approximately $476 million of common shares, funded $250 million for our share of equity for Legacy West, completed approximately $204 million of acquisitions and paid a $31 million special dividend. We also expect to complete approximately $110 million of additional 1031 acquisitions, which would bring total capital deployment to approximately $1.1 billion. When you roll all of that together, our expected sources exceed our uses by $240 million. We intend to be patient and flexible with that remaining capacity. We will continue to evaluate acquisitions, repurchases, and other uses through the same return-focused lens we always have. But in the current environment, our preference is toward balance sheet strength. I want to spend a moment on the structure behind our new 429-unit luxury multifamily development in One Loudoun, as it's a great example of capital efficiency we strive for.