Kite Realty Group Trust (KRG) Q2 2026 earnings call transcript

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 companies' 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 Chairman and Chief Executive Officer John Kite, President and Chief Operating Officer Tom McGowan, President and Chief Financial Officer Keith Feer, 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 will now turn the call to John.

All right. Thanks, Brian, and hello, everyone, and thanks for joining us today. Halfway through 2026, KRG's tenant demand remains healthy, our sign-not-open pipeline remains elevated, and 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 In the last 15 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 6 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 lists.

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 have 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 acquisitions 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, and 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 ConsenSys and AV. 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. ABR 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. And our sign-not-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 Loudon, a 429-unit development within our existing residential joint venture that we'll 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 saved property NOI guidance by 50 basis points at the midpoint to a range of 3% to 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. We're 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 NERI 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 were maintaining our full-year core FFO and NAIRED FFO guidance of $2.06 to $2.12 per share. This guidance assumes a 2026 same property NOI growth range of 3 to 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 Loudon 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 loss sales assets and $110 million of 1031 acquisitions. When considering core FFO guidance in the context of our accelerating same property assumptions it important to refer to page 5 of our investor deck On the quarter over quarter FFO bridge you 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 LLB contemplates recycling roughly 14% of our enterprise value, resulting in a platform transformation into upgraded portfolio quality and improved the durability of our cash flow, while maintaining our fortress balance sheet and having remarkably little impact to our earnings. This was only made possible by our discipline, 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. Through a tax-free recapitalization venture that owns the existing 378-multifamily unit development, we are reducing our ownership from 90% to 55%. The proceeds of that recapitalization, together with a contribution of land we already own, will fund the majority of our 55% equity interest in the new 429-unit development. Importantly, that step-down in our ownership of the existing Stabilized Project occurs over time as the new building is constructed. At quarter-end, our ownership stood at 77%. The $60 million gain you'll see in our financials relate to the recapitalization and deconsolidation of the existing joint venture and is entirely non-cash.

It is a modest transaction in the context of our enterprise, but reflects the creativity and discipline we bring to every dollar of capital we deploy.

Our balance sheet remains one of the strongest in the sector. As of June 30th, our net debt even was 5.1 times, near the low end of our long-term targeted range. During the quarter, we priced $345 million of 3.25% exchangeable senior notes due 2032, with proceeds funded on July 2nd. In connection with the notes, we entered into a capped call transaction that raised the effective conversion price to $41.91.

We intend to use the majority of those proceeds to retire our $300 million of unsecured notes due October 2026. The remaining $100 million maturity coming due in September 2026 will be retired with cash on hand. We have access to over $1.2 billion in total liquidity, providing us with significant flexibility to continue pursuing value-enhancing opportunities. Thank you to the entire KRG team for their relentless effort in driving our results. Operator, this concludes our prepared remarks. Please open the line for questions.

The contribution from the elimination of those assets is pretty modest. There's only three basis points. So, you think about it, that pool was 98% leased, but it had several spaces that had some rent coming online. So, for this particular period of time, they were not dilutive of same store. But, in general, reminder, these assets have, you know, $18 of ABR. They grow slower. They have higher watchless concentrations. So, in the long run, they'd be detractors for same store. But for this current, you know, this current year, they were only a small And then the call contribution again, just three basis points.

Yeah, Majid, as we're heading into 2027, you will see the capitalized interest related to that project step up. So yes, you'll see some capitalized interest.

Andrew, you're exactly right. Listen, we led with the disposition. We had the largest position in the second quarter, and it takes time to put those proceeds to use. So over the course of the next six months, we do our best, and we've got another $110 million of assets to buy. We've got to sell another $225 million. And all of that, when you put it into the mixture, the timing has that being two cent dilutive into 2026.

Yeah, I think, I mean, as we've said, obviously, we've been without specifics to each individual deal. The, you know, the project elevate in terms of selling the lower growth, you know, larger format deals have been kind of in the kind of low to mid seven cap range, and then the acquisitions have been closer in the lower six range. But it's really more about unlevered IRR that we're looking at because there's a lot of moving pieces in these deals. So we're still continuing to get between 8% and 9%. You know, that's our goal in terms of unlevered IRRs.

Sure. I mean, I think, you know, obviously we've been very diligent in how we've gone about releasing the portfolio. We've kind of talked in the past about what led us to those lower leased rates versus the peer group, you know, going back to the COVID era. And now we're obviously getting very close to where we were. In fact, the small shops are basically right there, and we're a couple hundred basis points under our, you know, high watermark on the anchor lease percentage.

I think more importantly, it's kind of the composition of those tenants that we're focused on, and I think that's the whole point of this Elevate exercise. And I hope you take a minute to kind of study our top 25 tenant list, and particularly our top 15, and compare that to where it was in the past. It's changed significantly for the good. And so I feel very good that we've done what we needed to do there, and now we're very focused on just executing the leasing platform. Demand remains strong, supply is low, and our portfolio is better. So it's a real opportunity to push that.

No, I think as kind of Heath mentioned, I think in his prepared remarks, and I did as well, I think the heavy lifting there is done. There's more transactional activity in the back half of 26, which is really more about harvesting some tax losses and doing some 1031s. But the composition of the portfolio that we have today, we feel very good about it. So as we move into 27, I think we're back to the historical kind of pairing a handful of sales and buys per year. The large scale stuff has pretty much worked its way through And again that why we talk about the composition of our top tenant list and how it changed so much So I think the real issue on that kind of dilution if you will is the fact that we I will now turn the call over to management for the KITE REALTY GROUP TRUST earnings conference call We will be able to leverage depending on how we feel about the environment.

Even as we sit here today, as we get to the end of the year, we will likely be sub-five. We are in a really good position, but we are not looking to continue any kind of dilution throughout remaining years from selling. That said, we've sold over a billion dollars, and we've basically kind of remained flat, which is kind of unbelievable. So, you know, we'll build it from there.

Sure. Well, in terms of the remaining sales, you should expect it, Flores, to be similar to what we've been selling. It's essentially just non-core. Obviously, we mentioned that there's some tax loss harvesting opportunities, which would indicate that the property is going to generate a loss. So I think it's similar. Each deal is a little bit different in size, but similar to what we've been selling. And in terms of land, that's not contemplated in that number. But as we've talked about before, we're always looking to maximize value on any kind of land parcel, and we're working on a couple opportunities there.

So in terms of the – you mentioned ground leases. I mean, again, nothing is really reflected in that number that would represent ground leases. We're always looking at that. It's about – I believe it's about 10% of our revenue. So it's a pretty substantial number. So it's always a possibility to utilize that in terms of cost-effective capital. But right now, that is not contemplated in that 200-plus million of future sales.

Heath, do you want to add anything to that? I think you hit it perfectly.

Sure. You know, our appetite, it remains healthy, but that's paired against a very rigorous underwriting process. And, you know, the market is aggressive, but, you know, when you have an opportunity for a generational-type asset, that's what happens. We're certainly aware of the properties that are in the market. We're always engaged. You know, we would love to add, you know, other very, very high quality assets like Legacy West and Southlake and Legacy East and one Loudon and Downtown Crown, just a few for an example. You know, we're always looking to add to that. As far as our partner that you referred to, you know, we have a great relationship. They are also very interested in expanding that portfolio, but are like-minded in the way that we diligently underwrite.

On a GAAP basis, I mean, we don't really give the GAAP number, but generally speaking, it's probably an additional 10% on a GAAP basis, generally speaking. I mean, if you look at what we've been doing on our small shop portfolio, right, it's, you know, 3% and 4% growth, so I would say 10% is a pretty reasonable GAAP, you know, spread addition.

Hey, Paulina. You know, from my perspective, I think we're definitely in a healthier environment for retailers. And I think this has just been a long build since COVID, which we talked about a lot in terms of how retailers rebuilt their enterprises and became much healthier from a balance sheet perspective. But obviously, you know, in this business, there's always, in my personal opinion, there will always be periods of time where, you know, outside forces would create a situation that would put more strain on a retailer. And there's also periods of time where retailers themselves put strain on their own business models, whether that be operational or balance sheet pressure. So it's a great question because it's really a part of why we're doing what we're doing in Project Elevate, which is, as we know, slightly different than maybe what some others are doing.

And I think our objective internally is that, you know, we don't think that hoping is a good strategy. We want to take, you know, intense action around creating a portfolio that is, you know, independent and withstands any of those outcomes. So I think, yes, we're in a much better environment. Yes, there's very low supply, and the majority of our retailers have rebuilt their businesses and have good platforms and balance sheets. But, you know, we want to be kind of independent of that, and that's a real big part of what we've been doing.

And Pauline, I'd add one thing that John talked about, the evolution of the retailer and how they've been far more efficient working on margins, profitability, et cetera. But we have been doing a much better job spending time with these retailers and understanding what their next store evolution looks like and how we can help them. And then understanding if that's different than what we have in the portfolio, how can then we can, you know, basically potentially get rid of some of those stores. So knowledge based on our side of the business has been equally important.

Polina, I'll add one more thing. So it's not only about us trying to concentrate, you know, our AVR and strong retailers during a good part of the cycle. But the other side of that coin is making sure that we're just not filling up those spaces with tenants that have, you know, equally suspect credit later on. So it's one is, you know, can we shed some assets and get our exposure to the right place? Number two, let's be super disciplined on underwriting and the way in and making sure that we're taking our time and putting the best balance sheet and the best use in our spaces.

Heath, do you want to start with that?

Yeah, I think the return profile on both is fairly similar. Honestly, you're looking at super high quality grocery in a good MSA. You're looking at super high quality lifestyle in a good MSA. Those cap rates, we've seen those converge recently. Particularly, you've seen a tremendous amount of compression in lifestyle over the past probably, I don't know, year. That product type has become very popular. Not surprisingly enough, I think we were part of the reason why it became so popular with Legacy West, which kind of gave people pricing discovery.

So again I think their initial yields are fairly similar and of course our return hurdles are the same We looking for somewhere between 8 and 9 unlevered return based on the quality asset the location etc So yeah they behaving fairly similarly in the transactional markets right now I think Paulina the thing I add is you right Those are right now our kind of favorite places to invest capital and as he said the return characteristics are similar There's a lot of differences, obviously, in the operational side of the business for both of those. And, you know, I think it's important that you have the capacity to be able to operate assets of the magnitude of, as I said, of a Legacy West or the South Lake.

It's quite different operating those assets than it is a neighborhood grocery anchor shopping center. Also, the embedded rent growth profiles are different. You have an opportunity to stretch that out, you know, in the lifestyle mixed use. And in the smaller neighborhood centers, you know, we're doing our best we can to get those above, you know, 165 basis point, you know, cruising speed. So it's interesting. They're similar, but they're different. And then, again, I think just the operational fortitude it takes to run, you know, a very high-quality lifestyle center is different. So I think it's important that the market, you know, understands that.

Yeah, that's a great question, Alex, and again, you're right that we have been underway on this for the last two years, but as we said on the call, we are nearing the end of that. So I think we have been making, you know, you have to look at this from a macro perspective and a micro perspective, right? I think you're kind of referring to the micro, which is each individual asset having, you know, a potential vacancy, and what is the upside, and, you know, what potential does that have to, you know, give us better returns over time. But it's also, as we mentioned, you know, as we focused on this and we looked at what we viewed as the future at-risk tenancy, you know, it wasn't really just about, you know, rent.

It was also about capital, right? And to the extent, and that's why we said in the prepared remarks, you know, that this was kind of a dual-headed exercise in the sense that, you know, this is a potential future interruption to earnings and a latent kind of claim on our capital, right? So I agree with you that the market is better, the retail environment is better, but we wanted to position ourselves with a portfolio over the next five plus years, not over the next five plus quarters. So I think that's the decision we made and have made, and I think it's reflective when you look at, you know, for example, if you just look at the last five quarters as this activity has been occurring, you know, are, I think this is off the top of my head, But if you look at our renewal rents, I think they average like $28, our non-option renewal rents.

And then you look at our new rents, they average $30, and that's against the backdrop of a $23 average portfolio. So everything we're doing is improving, and our growth is going to improve. So I'll give you that it's a somewhat short-term shuffle for a long-term gain, but we feel very strong in that long-term gain.

You know, I think it's more the latter. I think it's more about that we think we can place that capital into a better growing environment with lower risk, you know, on a risk-adjusted basis. But it's also, there are individual situations where the market has changed. And, you know, that's something that we've got to stay ahead of. I think, again, I mentioned hope's not a great strategy. I think people, when things get going well, people are like, they like to ride that and say, oh, it's all great. But you've got to think way ahead. And, you know, we've been doing this for a very long time. We've been through a lot of different cycles, you know, and we've been through the worst cycles.

So I think what we're saying is our portfolio will be able to withstand those and grow throughout them. So I think that's it, Alex. It's just like really trying to think ahead. And I know the market has, you know, intense pressure to be short term, and I get it. We all live in it. But we're trying to make decisions that will pay dividends for everybody, literally, for a very long time.

I mean, I hate to say it. It's all of them. And I think we do start with the idea that our goal is to have the highest quality portfolio that has an embedded growth rate that is exceeding, you know, our competition. That is our goal. And as you know, having raised our embedded growth rate 50 basis points in two years, I think that's right, or is it 30? 30 basis points in my head. 30 basis points in two years. I think that's hard to do on a portfolio of our magnitude. And, you know, so we start there, but then it does become an exercise around the quality of the tenancy, the durability of that cash flow, and the capital associated with owning those.

I mean, everybody likes to talk about rent spreads, but, you know, capital is a very big part of that when you're looking at new rent spreads. So we're trying to say we want to have the portfolio that's going to generate the most, you know, strongest risk-adjusted cash flow. So it's all of those. I hate to be cute with that. I wouldn't rank any one of them, but in the end, we're trying to get, you know, that growth rate up to 2%, you know, our embedded growth rate. That's our goal.

This is Steve. I was just saying, listen, when we're figuring out our disposition pool, it's very much a scoring exercise. And some of the things that we're looking at are the things you're mentioning. What's the growth like? You know, how many watchlist tenants do we have? Is it a market that we like or not like? So all these things kind of go into a blunder, and then we rank them and say, okay, this seems to be the part of the portfolio that makes the most sense for us to transact on. Is it ready to sell? Right? Is it a saleable asset right now? So those are the things that go into it. But the job point, the main goal here was to ensure that we are going to loft our growth, to keep having that embedded growth pile improve over time, and to make sure that we're not having earnings hiccups by having problems with watchless tenants.

I'll also point back to what Tom said earlier. What feedback are we getting from our customers, our tenants, and where are they positioned to grow? And, you know, we're talking to them, as Tom said, you know, well in advance of these decisions. And, you know, we might learn some things from two or three tenants over a few meetings that would say, you know what, maybe the long-term prospect for that property is not as good as we thought it was.

And, Heath, I know you gave a lot of color in your opening remarks. Can you just kind of dive back into some of those assumptions, whether that's the 100 bibs of bad debt assumed in the back half or something else that I may have missed? Yeah, I mean, the slight deceleration, let's call it flat, into the back half of the year is simply this idea that we outperformed in the first part of the year. So nothing happened in the back half that we weren't expecting. But again, and the great thing about the first half outperformance is that it was really organic. It was core items. You know, it was better retention. It was better net recoveries, better overage.

So we were just firing on all cylinders across the portfolio, which allowed us to, you know, to print that 3.7% number. I did say at the beginning of the year I thought we'd be moderating it to the first half and accelerating it to the back half. However, we did really well in the first half and are going to continue that momentum to the back half.

Yes, slight deceleration.

Again, I just want to thank everybody for taking the time today, and we really appreciate your interest in the company. Look forward to seeing you soon.