Prepared remarks
Thank you for standing by. Welcome to the Kite Realty Group's Second Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press Star 1 then 1 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press Star 1 then 1 again. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Bryan McCarthy, Senior Vice President, Corporate Marketing and Investor Relations. Please go ahead, sir.
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 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 A. Kite; President and Chief Operating Officer Thomas K. McGowan; President and Chief Financial Officer Heath R. 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 will now turn the call to John.
All right. Thanks, Bryan, and hello, everyone, and thanks for joining us today. Halfway through 2026, KRG's tenant demand remains healthy. Our signed-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 months, our capital allocation initiatives, collectively referred to internally as Project Elevate, have focused on pruning lower growth, noncore 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 have sold 22 noncore 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 have 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 tenant locations representing over one 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-anchored 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 fast-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 one 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 signed-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 Loudoun, a 429-unit development within our existing residential joint venture that will begin delivering in 2029. It's the latest example of the self-funding growth built into our portfolio. Given the strength of the first half, we are raising our full-year same 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. All the heavy lifting on Project Elevate is behind us. We still have some work to do, and our guidance continues to assume a meaningful amount of gross transactional activity remaining in 2026, split between the sale of noncore 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, 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 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. A nearly $7 million sequential decline is largely attributable to two factors: higher interest income generated from Project Elevate proceeds being held in sweep accounts and the deconsolidation of our One Loudoun residential joint venture, which I will address in a moment. As for the remaining transactional activity in 2026, we are assuming approximately $225 million of noncore tax loss sale assets and $110 million of 1031 acquisitions. When considering Core FFO guidance in the context of our accelerating same property assumptions, it is important to refer to page 5 of our investor deck. On the quarter-over-quarter FFO bridge, you will see a two-cent 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 is worth taking a step back to consider this context. Project Elevate contemplates recycling roughly 14% of our enterprise value, resulting in a platform transformation and an upgraded portfolio quality and improved 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 noncore 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 noncore tax loss 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 $470 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 is a great example of the capital efficiency we strive for through a tax-efficient recapitalization.
By structuring a recapitalization that owns the existing 378-unit multifamily 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 will see in our financials related to the recapitalization and deconsolidation of the existing joint venture 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 30, our net debt to EBITDA was 5.1x, 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-enhanced 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 lines for questions.
Questions and answers
Certainly. And as a reminder, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Todd Thomas from KeyBanc. Your question, please.
This is Sean Glass on for Todd. Can you speak to the impact or improvement on the same store NOI outlook that can be attributed to the dispositions completed so far year to date? Like, how much of the same store NOI growth improvement is from dispositions versus operational upside?
Yeah. The contribution from the elimination of those assets is pretty modest. It is only three basis points. Think about it: that pool was 98% leased, but it had several spaces that had some rent coming online. So in this particular period of time, they were not dilutive to same store. But in general, reminder, these assets have about $18 of ABR. They grow slower and they have higher watch-list concentration. So in the long run, they would be detractive for same store. But for this current year they were only a small contribution—again, just three basis points.
Okay. That is helpful. And then you may have touched on this, but is there any expected capitalized interest related to the One Loudoun residential product? Any notable impact that may have on interest expense as we think about 2027?
Yes. As we are heading into 2027, you will see the capitalized interest related to that project step up, so you will see some capitalized interest.
Thank you. And our next question comes from the line of Andrew Reale from Bank of America. Your question, please.
Good afternoon. Thanks for taking my questions. Heath, you had some helpful color in your prepared remarks, but I guess just going back to the guidance to confirm: could you maybe just walk through exactly what is driving the two-cent dilution this quarter in the guidance bridge? It sounds like a lot of that is just from the timing of the recycling. Just wondering if there might be any other moving pieces?
Andrew, you are exactly right. Listen, we led with the dispositions. We had the largest portion in the second quarter and it takes time to put those proceeds to use. So over the course of the next six months, we will do our best. We've got another $110 million of 1031 buys and we have to sell another $225 million. All of that, when you put it into the mix with the timing, results in that two-cent dilution into 2026.
Okay. And then maybe just for the 1031 recycling in the most recent quarter, what was the cap-rate spread on those transactions?
Cap-rate spread? You just mean what—go ahead. I am sorry. Say that again. Yeah. I think, as we have said, obviously, we have been without specifics to each individual deal. The Project Elevate sales of the lower-growth, larger-format deals have been kind of in the low- to mid-7% cap range, and the acquisitions have been closer in the low-6% range. But it is really more about unlevered IRR that we are looking at because there are a lot of moving pieces in these deals. So we are still continuing to get between eight and nine percent—those are our unlevered IRR goals.
Thank you. Thank you. And our next question comes from the line of Jamie Feldman from Wells Fargo. Your question, please.
Great. Thanks for taking the question. So thinking about your economic occupancy at the end of Q2 at about 91.2%, which is about 250 basis points below your historic highs, and many of your peers are at their historic highs—can you talk about the opportunity set there longer term and how much the SNO pipeline may contribute to higher absolute occupancy levels in the second half of 2026 and into 2027 as we think about more regular-weight churn going forward?
Sure. Jamie, I think you know we have been very diligent in how we have gone about re-leasing the portfolio. We have talked in the past about what led us to those lower leased rates versus the peer group going back to the COVID era. Now we are getting very close to where we were, and in fact the small shops are basically right there. We are a couple hundred basis points under our high watermark on the anchor lease percentage. More importantly, it is the composition of those tenants that we are focused on, and I think that is the whole point of this Elevate exercise. I hope you take a minute to study our top-25 tenant list and particularly our top 15 and compare that to where it was in the past. It has changed significantly for the good. I feel very good that we have done what we needed to do there, and now we are focused on executing the leasing platform. Demand remains strong, supply is low, and our portfolio is better, so there is a real opportunity to push that.
Okay. And then given the progress on Elevate year to date and into the back half, what are your thoughts on how much longer it continues into 2027? You have got the two-cent drag on 2026—do you think drags continue into next year?
No. As Heath mentioned in his prepared remarks, and as I did as well, the heavy lifting there is done. There is more transactional activity in the back half of 2026, which is really more about harvesting some tax losses and doing some 1031 exchanges. But the composition of the portfolio that we have today, we feel very good about it. As we move into 2027, I think we are back to the historical kind of pairing: a handful of sales and buys per year. The large-scale stuff is pretty much worked its way through. The real issue on that kind of dilution, if you will, is the fact that we are sitting on $240 million of cash that we have not deployed. We do not know exactly how that will be deployed. We will be opportunistic—acquisitions, buybacks, reduction of 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-5x leverage. We are in a really good position, and we are not looking to continue any kind of dilution throughout the remaining years from selling. That said, we have sold over $1 billion and basically remained flat, which is kind of unbelievable. We will build from here.
Thank you. Thank you. And our next question comes from the line of Floris van Dijkum from Ladenburg Thalmann. Your question, please.
Hey, thanks, guys. I love your cruising speed continues to inch higher. You mentioned something about the $225 million of additional noncore sales. Maybe if you could touch upon whether they are more of the power-center assets you also still have? I believe you have two big parcels of land that currently yield zero that potentially could get sold. Maybe you can give us an update and potentially touch on some of your ground rent income as well as being a potential candidate for disposal going forward?
Sure. In terms of the remaining sales, you should expect them to be similar to what we have been selling; essentially just noncore. We mentioned that there are some tax-loss-harvesting opportunities, which would indicate the property is going to generate a loss. So I think it will be similar in type to what we have been selling. Each deal is a little different in size. As far as land, that is not contemplated in that number, but as we have talked about before, we are always looking to maximize value on any kind of land parcel and we are working on a couple opportunities there. In terms of ground leases, nothing is really in that number that would represent ground leases. Ground rent is about 10% of our revenue, so it is a substantial number and it's always a possibility to utilize that as 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.
Okay. And maybe my follow-up, if I may, on the acquisitions front. Over the past quarter, there were a number of larger mixed-use legacy-type assets in the market. What is your appetite for doing additional transactions and what is the upside with your partner potentially if you were to use that in your JV structure?
Our appetite remains healthy, but that is paired against a very rigorous underwriting process. The market is aggressive, but when you have an opportunity for a generational-type asset, that is what happens. We are certainly aware of the properties that are in the market and we are always engaged. We would love to add other very high-quality assets like Legacy West, Southlake, and One Loudoun—Downtown Crown, just a few examples. We are always looking to add to that. As far as our partner, we have a great relationship. They are also very interested in expanding the portfolio and are like-minded in the way we diligently underwrite.
Thank you. And our next question comes from the line of Michael Mueller from JPMorgan. Your question, please.
Hey, guys. Thanks for taking the question. You have Nahum on for Michael this afternoon. Just a quick one from us: it looks like your blended cash lease spreads have been in the low teens for the last 12 months. What is that roughly translating to on a GAAP basis?
On a GAAP basis, we do not really give the GAAP equivalent number, but generally speaking it is probably an additional 10% on a GAAP basis. If you look at what we have been doing on our small-shop portfolio, for example, it is about 34% growth. So I would say 10% is a reasonable gap to think about.
Thank you. And our next question comes from the line of Paulina Alejandra Rojas-Schmidt from Green Street. Your question, please.
Good afternoon. My question is about retailer health. Most REITs are describing their tenant rosters as healthier than historically. Do you say we are entering a period of structurally lower tenant failures, or do you view this year as experiencing generally bad debt below expectations more as a good year or more as an anomaly?
Paulina, from my perspective, we are definitely in a healthier environment for retailers, and this has been a long build since COVID. Retail rebuilt their enterprises and became much healthier from a balance-sheet perspective. That said, in this business there will always be periods where outside forces create strain on a retailer, and there will be periods where retailers themselves put strain on their own business models, whether operationally or on the balance sheet. This is a big part of why we are doing Project Elevate, which is slightly different than what some others are doing. Our objective internally is that hoping is not a strategy—we want to take intense action around creating a portfolio that is independent and can withstand adverse outcomes. So yes, we are in a much better environment with low supply and many retailers having rebuilt their businesses and balance sheets, but we want to be independent of that and that is a big part of what we've been doing.
Paulina, I would add that beyond the evolution of retailers becoming more efficient and improving margins and profitability, we have been doing a much better job spending time with these retailers to understand what their next-store evolution looks like and how we can help them. If that evolution differs from what we have in the portfolio, we can then consider how to reposition or remove those stores. That knowledge has been equally important.
I will add one more thing.
So it's not only about concentrating our ABR in strong retailers during a favorable part of the cycle, but also making sure we are not filling spaces with tenants that have equally suspect credit later on. One side of the strategy is shedding assets to get exposure in the right places; the other is being super disciplined on underwriting on the way in and taking our time to put the best balance-sheet tenants in our space.
When I think of the two buckets that you like the most—neighborhood centers and lifestyle mixed-use centers—for the specific level of quality and type of location you are pursuing in each, how does the return profile compare between the two buckets? To the extent they differ, where does the difference typically stem from? Is it entry pricing, growth profile, CapEx?
Paulina, the return profile on both is fairly similar. We're looking at super-high-quality grocer-anchored assets in good MSAs and super-high-quality lifestyle in good MSAs. Those cap rates have converged recently, particularly with tremendous compression in lifestyle over the past year as that product type became popular. Our initial yields are fairly similar and our return hurdles are the same—we're looking for somewhere between eight and nine percent unlevered return based on the quality of the asset and location. So they are behaving fairly similarly in the transactional markets right now.
I would add that while those are right now our favorite places to invest capital and the return characteristics are similar, there are operational differences. Operating a very high-quality lifestyle center is different than operating a neighborhood grocery-anchored shopping center. The embedded rent growth profiles are different—there is an opportunity to stretch that out in lifestyle mixed-use, whereas in smaller neighborhood centers we are working to get those up to a strong cruising speed. So they are similar but different, and running a large lifestyle asset requires operational capacity that is distinct from smaller centers.
Thank you. Thank you. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Your question, please.
Hey, good morning. John, you guys have been repositioning the portfolio for a while. In the current environment, especially since COVID, the strength of the landlord's hand has improved tremendously. Has that changed at all? I know you are talking about selling centers with weaker tenants in them, but don't those weaker tenants provide future GLA to be able to lease to stronger ones? How do you balance selling a center that could have upcoming vacancy that could go to better retailers versus exiting it and not having to deal with the year or two when the tenant leaves and you have to re-lease?
That is a great question. You are right that landlords' bargaining power has improved and in many cases that creates upside opportunity to re-lease. We evaluated this from both macro and micro perspectives. Yes, at the micro level each individual asset could provide future vacancy for better retailers, but at the macro level we evaluated the potential future interruptions to earnings and the latent claims on our capital associated with those at-risk tenants. This was a dual-headed exercise: protecting earnings stability and avoiding future capital claims. We wanted to position the portfolio to withstand future cycles over the next five-plus years, not just the next few quarters. The decisions we've made improve the overall portfolio quality and the growth profile, which we believe outweighs the short-term upside of holding assets that may require capital and risk later on.
And then, John, as you look at the assets that you are selling, which you have owned for quite some time, is it that the market has changed, the submarket has changed, or what has changed in the underwriting from when you originally bought or developed these assets to now that you are selling them? Trying to understand if it is market, tenant, submarket, or simply that your future money is better deployed elsewhere.
I think it is more the latter. We believe we can place that capital into faster-growing opportunities with lower risk on a risk-adjusted basis. There are individual situations where markets have changed and we have to stay ahead of that, but broadly this is about reallocating capital to higher-return, lower-risk opportunities and thinking long term. We have been through many cycles and are focused on decisions that will pay dividends for a long time.
Thanks. Thank you. And our next question comes from the line of Conor Mitchell from UBS. Your question, please.
Hey. Thanks for taking my question. Following up on that line of thinking—where do you start with the thought of an asset disposition? Is it the growth outlook, the format type, or reduction in watch-list tenant exposure?
I hate to say it, but it is all of them. Our goal is to have the highest-quality portfolio with an embedded growth rate exceeding competition. We start there, but then it becomes an exercise around the quality of tenancy, the durability of cash flow, and the capital associated with owning those assets. There are many factors—growth prospects, watch-list exposure, market attractiveness—and we weigh them all to improve our embedded growth rate and overall portfolio durability.
From the disposition-planning perspective, it is very much a scoring exercise. We look at growth, watch-list concentration, market attractiveness, saleability, and readiness to sell. We blend those factors into a ranking and transact on the parts of the portfolio that make the most sense to improve embedded growth and reduce the risk of earnings hiccups from watch-list tenants.
I would also point to tenant feedback. We talk to our customers and tenants well in advance and understand where they are positioned to grow. That input helps shape our decisions about which assets to reposition or dispose of.
We might learn something from a few tenants in a few meetings that indicates the long-term prospects for a property aren't as good as we thought, and that can factor into the disposition decision.
Okay. Really appreciate all the color. Then switching gears a bit, same property NOI has been pretty strong the past couple of quarters—3.7%, 3.6%. You raised guidance, but looking at the back half midpoint it seems like there would be a deceleration. Heath, can you dive back into some of those assumptions, whether that is the 100 basis points of bad debt assumed in the back half or something else we may have missed?
The slight deceleration into the back half is simply because we outperformed in the first half. Nothing unexpected is happening in the back half that we did not plan for. The first-half outperformance was organic across core items: better retention, better net recoveries, better overage. We had initially thought we'd moderate in the first half and accelerate into the back half, but we did really well in the first half and will continue that momentum into the back half. The slight deceleration at the midpoint reflects that the first half was stronger than our initial internal plan.
Thanks. This does conclude the question-and-answer session of today's program. I would like to hand the program back to John A. Kite, CEO, for any further remarks.
Again, I just want to thank everybody for taking the time today. We really appreciate your interest in the company and look forward to seeing you soon.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.