Kite Realty Group Trust Q3 FY2025 earnings call

• The KRG team is driving occupancy higher, leasing space at strong spreads, and embedding higher rent bumps.
• In the third quarter, 7 new anchor leases were executed, including with Whole Foods, Crate & Barrel, etc.
• There has been proactive diversification of the merchandising mix, with 12 different retail concepts in 19 anchor leases signed year-to-date.
• Small shop occupancy is within 70 basis points of the previous high watermark.
• Humblewood, a center anchored by Michaels and DSW, was sold, and there is a disposition pipeline of approximately $500 million.
• 3.4 million shares were repurchased at an average price of $22.35 for about $75 million.

KRG earned $0.53 of NAREIT FFO per share and $0.52 of core FFO per share in the third quarter. Same-property NOI increased 2.1% year-over-year, primarily driven by a 2.6% rise in minimum rent. The company recognized $39 million in impairments during the quarter, with $17 million at City Center and $22 million across Carillon land and Carillon MOB. The midpoints of the 2025 NAREIT and core FFO per share guidance have been raised by $0.02 each, and the same-property NOI growth assumption has been increased by 50 basis points.

• The midpoints of the 2025 NAREIT and core FFO per share guidance have been raised by $0.02 each.
• The same-property NOI growth assumption has been increased by 50 basis points.
• The outperformance in same-property NOI is due to earlier-than-expected rent commencements and stronger specialty leasing income.
• It is anticipated that most of the $500 million disposition pipeline will be completed by year-end, with proceeds intended for deployment into 1031 acquisitions, debt reduction, share repurchases, and/or special dividends.

• Uncertainty regarding the closure of asset sales and the taxability of the proceeds.
• Potential impact on earnings dilution depending on how the sale proceeds are deployed.
• Complexity in the taxability associated with asset sales and their effect on future financials.

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

A: John Kite responded that it's fair to say the dispositions align with prior messaging of shrinking the middle part of the portfolio, focusing on larger format centers and power centers. Heath Fear added that on a net-net basis, the entire pool would be accretive to same-store but it depends on the mix of assets closed.

Q: I guess just sticking with the dispositions, I guess just curious if you could -- if we could dig a little deeper and you could give us an idea of just where occupancy is and what the exposure to watch list retailers is like within the assets that are in the pipeline? And then how much more volume beyond the $500 million right now could you potentially look to sell?

A: John Kite said occupancy in stabilized properties and there is exposure to watch list tenants in larger format power centers. He mentioned being focused on closing the current $500 million pipeline by year-end and then looking to further improve the portfolio and embedded rent growth.

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

A: Heath Fear said it's too early to tell, with more visibility in February on proceeds deployment. John Kite added complexity in taxability and focus on closing current dispositions.

Q: Just want to go to the City Center. That one was impaired. And as we think about it, you had mentioned that is one of the assets that you were recycling as part of the Legacy West transaction. I mean, does that -- does the further write-down of that change any of the accretion math that you guys put out in that Legacy West deal? And maybe where should we think about the cap rate for that deal? Is that north of a 10% cap and kind of the Carillon MOB and development land as well? I mean, these prices are coming in below your expectations, it seems like. Can you just talk about where yields are?

A: John Kite said it has de minimis impact on Legacy West yields. Heath Fear mentioned Carillon sales help minimize dilution, with one asset having no NOI and another NOI light.

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

A: John Kite said the watch list is in good shape, more isolated to individual tenant names. Thomas McGowan updated that 83% of 29 bankruptcy tenants are leased or in LOI negotiations.

Q: Two questions. First is on the $500 million of sales, just so I'm clear. I understand that there are different options that you're going to use the proceeds for buybacks, reinvestment, et cetera. But overall in -- over shopping centers' history, whenever we see large asset sales, it usually means that earnings inevitably takes a step back until all of the proceeds are processed and whatever it's reinvested into can start to grow again. So it does sound like this is an impact to '26. Is that a fair way to look at it? Or your view is that this should be flat to '26 and we shouldn't be thinking about the $500 million having an earnings impact?

A: Heath Fear said there are many moving pieces, with more visibility in February. John Kite added focus on minimizing earnings disruption and taxability.

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

A: Heath Fear said they're seeing potential for same-property NOI growth to get closer to 2.75% to 3.75% based on portfolio composition. John Kite added focus on embedded rent growth and total return to shareholders.

Q: My second question is, you have in your presentation, you highlight very active -- a very active quarter in terms of leasing activity with grocers. I believe based on your numbers, you're at 79% of ABR coming from grocery-anchored centers. Do you have a target in mind for this figure? Or you don't even think about a target at all?

A: John Kite said there's no target driving the decision-making, but adding grocers changes shopper composition and day-to-day activity.

Q: I wanted to follow up, when you talked about the anchors that you signed year-to-date that had new formats. And specifically, just looking at small shop occupancy, it seems like you have more upside opportunity than peers. Is the -- are the 12 new formats that you're looking at, is this a trend across the whole portfolio to help improve and drive better small shop occupancy? And is this a shift to upgrade retailers? Or are you modifying the retail mix at the properties due to shifting consumer demand?

A: John Kite clarified the question was about small shops, responded that diversifying anchor tenant mix helps create a better shopping center, driving small shop occupancy and decoupling from excessive exposure to any one anchor.