Kite Realty Group Trust - Q1 2024
May 1, 2024
Transcript
Operator (participant)
As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Bryan McCarthy, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.
Bryan McCarthy (SVP of Investor Relations)
Thank you, and good afternoon, 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 Form 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 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, Executive Vice President and Chief Financial Officer, Heath Fear, Senior Vice President and Chief Accounting Officer, Dave Buell, and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. I'll now turn the call over to John.
John Kite (Chairman and CEO)
Thanks, Bryan, and thanks, everybody, for joining today. KRG has maintained our momentum into the first quarter of 2024, delivering exceptional execution across our platform and further strengthening our already best-in-class balance sheet. Heath will walk you through the details of our quarterly results and increased guidance, and I'll focus on recent sector trends, our operating priorities, and the series of strategic, well-timed initiatives that have allowed KRG to earn the highest total return in the open-air retail space over the past five years. Open-air retail has demonstrated strong fundamentals and rapidly accelerated recognition of its essential role in each community we serve. The reappreciation of open-air's critical role as the most convenient and profitable distribution channel has resulted in consistent demand across our portfolio from both our tenants and shoppers.
The renaissance of open-air retail is amplified in the Sun Belt, where our portfolio benefits from migration trends out of higher cost living, out of higher cost of living metros into warmer, lower-tax states. The top 10 MSAs for population growth in 2023 account for over 30% of our revenue and includes cities like Dallas, Houston, Atlanta, Orlando, Tampa, and Phoenix. On the operational front, we remain laser-focused on creating the best experience possible at our centers by selectively adding high-quality tenants to our portfolio. Since the beginning of 2022, we've executed 53 anchor leases to 36 different brands, over 90% of which were national tenants, and we increased our grocery exposure by 400 basis points to nearly 80%.
We've generated 46% comparable cash spreads and 26% returns on capital, and we're very confident in our ability to continue the robust leasing efforts. Our thoughtful approach, prioritizing quality and value creation, will continue to enhance the merchandising mix at our centers and improve the credit profile of our tenant base. On the small shop side, we continue to have success pushing higher embedded growth. For new and non-option renewal shop leases signed in the first quarter of 2024, the average annual growth was 3.4%, and 70% of these leases had fixed rent bumps greater than or equal to 4%. To illustrate the tremendous progress we've made, in 2022, the average annual growth was 2.7%, and only 3% of the leases had fixed rent bumps greater than or equal to 4%.
The benefit of negotiating higher fixed rent bumps will take time to materialize, but our efforts are on track to provide tangible improvements to our long-term embedded growth profile. Maintaining a disciplined leasing approach by keeping quality and growth at the forefront will further strengthen our durable cash flow stream while generating strong risk-adjusted and absolute returns. Our signed not open pipeline increased to $32 million, and we expect 76% of the NOI to commence in 2024. On pages six and seven of our latest investor deck, we detail the commencement timing of the signed not open pipeline and the compelling opportunity for investors based on current share price at various capitalization rates. These pages do not account for the future opportunity to allocate free cash flow, which we expect will significantly ramp up as our elevated leasing spend normalizes.
Along with our increased free cash flow, we expect meaningful AFFO and dividend growth. While the opportunity for investors is very compelling right now, we believe the future holds an even more convincing case for KRG, with better growth and more capital to allocate. Over the last five years, KRG has earned the highest total return in our sector. We were able to accomplish this by improving the quality and location of our portfolio, fortifying our balance sheet, executing on a transformational merger, improving our credit ratings, and rerating our cost of debt. These very well-timed successes could not have dovetailed better with the open-air retail supply and demand imbalance, the acceleration of consumer trends spurred by the pandemic, and the increased commitment to physical retail.
Our continued execution has allowed us to raise the midpoint of our 2024 FFO guidance by $0.02 and our same-property NOI growth assumption by 50 basis points. Our team has produced solid results, and collectively, we've positioned the company to continue outperforming. We have an experienced group across all departments of the organization, and I hope each of you will get to spend time with our various team members at our remaining Four in 24 events in Dallas, Washington, D.C., and Las Vegas. Thank you, as always, to our incredible team. And now I'll turn the call to Heath.
Heath Fear (EVP and CFO)
Thank you, and good afternoon. Following John's remarks about our Four in 24 series, our initial event last February was very well received and showcased the strength of the Naples market, the underlying quality of our bread-and-butter assets, and the intensity of our operating platform. We are anticipating a great turnout for our next event in Dallas, which is our largest market in terms of ABR and GLA. In Dallas, we will tour over 5% of KRG's total NOI, while demonstrating the prowess of our leasing team using Southlake Town Square as our case study. Southlake is one of the nation's premier mixed-use lifestyle centers, and we can't wait to show you the tremendous progress we have made.
Turning to our results, for the first quarter of 2024, KRG earned $0.50 of NAREIT FFO per share, which was slightly higher than anticipated due to outperformance in same-property NOI and an unbudgeted termination fee. Same-property NOI grew by 1.8%, bolstered by increases in minimum rents and lower bad debt, as offset by a decrease in net recoveries, primarily due to the timing of recoverable operating expenses. Based on the first quarter outperformance and our revised outlook for the balance of the year, we are increasing our 2024 FFO guidance by $0.02 at the midpoint to a range of $2.02-$2.08. At the midpoint, we assume a full-year bad debt assumption of 80 basis points of total revenues and a full-year same-property NOI growth assumption of 2%.
This represents a 20 basis points bad debt improvement and a 50 basis points improvement in same-property NOI growth as compared to our original guidance. The improvement in the full-year bad debt component is a function of combining the actual bad debt we experienced in the first quarter, which was approximately 30 basis points of first quarter revenues, with the continued assumption of 100 basis points of bad debt of total revenues for the remaining three quarters. As we detailed last quarter, our same-property growth for 2024 was adversely impacted by our disproportionate exposure to Bed Bath, the unexpected departure of a large theater tenant, and the extremely low bad debt we experienced in 2023. Absent these three items, our same-store growth assumption for 2024 would be 3.5%.
In terms of the trajectory for 2024, we expect same-property NOI growth to accelerate in the back half of this year, providing a solid foundation for growth into 2025 and 2026. As always, our goal with giving guidance is to prudently set expectations while leaving room to outperform. With that in mind, our guidance does not include certain recurring but unpredictable items, including lease termination fees, land sale gains, or prior period collections, unless and until the same are committed. Following our well-timed bond issuance, Moody's upgraded KRG to Baa2, and Fitch revised our outlook to positive. Furthermore, we are optimistic that S&P's positive outlook will mature into a full upgrade to BBB in the next few quarters.
On page 14 of our investor presentation, we show the complete overhaul in our cost of debt relative to the BBB REIT index. As we continue to demonstrate our commitment to maintaining a strong balance sheet and show the same commitment to the unsecured debt market, we expect our debt pricing, our debt pricing will continue to compress. As a reminder, we continue to hold the proceeds from our $350 million January bond offering in an investment account, earning interest in excess of the yield on our 2024 maturities, which we intend to retire in late June and mid-July. At 5.1 times net debt to EBITDA, approximately $1.2 billion in available liquidity, a debt service coverage ratio over 5 times, and healthy operating fundamentals, our credit profile is one of the best in the sector.
As highlighted on page seven of our investor deck, the current stock price of KRG represents an extremely compelling entry point. The recent private market transactions serve to solidify our current value proposition. We believe that the catalysts for a change in our equity multiple are clear in the form of outsized occupancy gains over the next two years, strong pricing power, higher embedded growth, low leverage, improved cost of debt, and significant free cash flow in the outer years. Thank you all for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.
Operator (participant)
Certainly. Thank you. One moment for our first question. Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your question, please.
Todd Thomas (Managing Director)
Hi, thanks. Good afternoon. First question, just around the guidance, and last quarter, specifically, you talked about the $0.02 drag from the theater vacated City Center in White Plains. Looks like a lease may have been signed with a replacement tenant. I'm just curious if you can talk about that and provide some detail around the rent and perhaps timeline for rent to commence. Didn't sound like there was anything factored in the updated guidance as it pertains to that.
John Kite (Chairman and CEO)
Hey, hey, Todd. Well, you can assume that the guidance does take that into account, and that, you know, we're not going to obviously get specific about an individual tenant's rent, et cetera. But we can tell you that, you know, it's an 80,000 sq ft deal, and it's a tremendous opportunity for us to quickly backfill something that is not easy to do. And we're really, we were focused on getting that done. The payback period for this deal is less than two years. It's, almost a 50% return on cost. So it's a fabulous deal, and suffice to say, the rent, the in-place rent is less than the previous, tenant was paying. But, there's definitely a small pickup, for the year. It's probably less than half. It's around a half a penny for the year.
So it's really more about the fact that we were able to get a great operator in quickly, and again, to a difficult situation in terms of going into a vertical retail establishment. So very happy with it. Tom, if you want to add anything?
Tom McGowan (President and COO)
Yeah, the only thing I'd add, Todd, is one of the things that we really wanted to accomplish to protect that zone from an exhibitor standpoint was get them open as quickly as possible. They're gonna start doing some soft openings next week, and then I think the week after, we should be ready to go. So that was one of our big goals that we have achieved.
Todd Thomas (Managing Director)
Okay. And the timeline for, is there a free rent period or any concessions, or is rent scheduled to commence, you know, relatively?
John Kite (Chairman and CEO)
Rent, rent. Yeah, rent will commence when they open, so no free rent.
Todd Thomas (Managing Director)
Okay. Okay, got it. And then, you know, can you provide a little bit of additional detail on the lease termination fee in the quarter? Sounds like that was not previously anticipated. Can you just discuss that a little bit more and provide some additional color?
John Kite (Chairman and CEO)
Yeah, Todd, very simple. It was just a bank branch that decided to close, and, you know, we did a healthy NPV in the remaining rent payments, and they paid us a termination fee. So not something we were expecting, but I'm happy to take that rent termination fee and go ahead and re-lease that space. So it was a win-win for us.
Todd Thomas (Managing Director)
Okay. And then, you know, just lastly, you know, Heath, you talked about, you know, the company's leverage profile and credit metrics, and, you know, I wanted to ask about acquisitions again this quarter. Sounds like there's a little bit more deal flow across the industry. Just given where, you know, the balance sheet sits today and, you know, sort of the position that you're in, just wanted to get a sense of your appetite for investments and, if you could discuss, you know, kind of price trends that you're seeing in the market.
Heath Fear (EVP and CFO)
Sure, Todd. You know, look, I think we continue to be very focused on the execution on in our operating platform right now and a little less focused on external opportunities. You know, look, when we've been very clear that, you know, in the next two years, we're gonna spend over $200 million in terms of TIs and LCs. Some people may call that redevelopment, but it's leasing, and it's great because the returns on capital are extremely high. Everything's very quantifiable in terms of the risk. So that is really our focus, and it will generate significant free cash flow for us once we complete that lease-up plan. So that doesn't mean we aren't looking at outside opportunities. We obviously are.
We will continue to do some paired trades like we've talked about in the past, where we would sell some assets and then look to redeploy the capital into higher growing, better positioned properties. In terms of what we're seeing in the market, the market is getting more activity. There's liquidity. Look, open-air retail is a very sought after asset class right now, despite the fact that, you know, you look at our, where our stock trades, you wouldn't think that. But in the private market, this is a very sought after asset class, and our properties are very sought after. So it is, it's definitely compressed. It's harder to find opportunities at yields that, you know, we want to even think about relative to the yields that we're getting in our leasing platform.
We will do some transactions. I would say that, you know, the high quality stuff continues to trade in kind of the high 5 to low 7 area, depending on what it is and where it is. And so obviously, that's quite disproportionate from where we trade from a stock price perspective.
Todd Thomas (Managing Director)
Okay. Thank you.
Operator (participant)
Thank you.
John Kite (Chairman and CEO)
Thanks, Todd.
Operator (participant)
Moving on to our next question. Our next question comes from the line of Floris van Dijkum from Compass Point. Your question, please.
Floris van Dijkum (Managing Director)
Hey, guys. Thanks for taking my question. So, John, I hear you talk about the discounted multiple and, you know, the lack of recognition in the market, potentially for some of the, you know, the significant improvements you've done. And I'm curious what your thoughts are to share buybacks, because you are generating a fair amount of free cash flow after dividends. You are trading at a discount, and your balance sheet, you know, thanks to, you know, the work that Heath has done on the balance sheet, is the best or ties for the best or lowest leverage in the shopping center space. Why would you not, you know, at least show the market that you're undervalued by buying back, even if it's a, you know, a small amount of stock?
John Kite (Chairman and CEO)
Sure. Thanks for the question. Look, I think, first of all, first and foremost, as a team and as a very focused operating platform, you know, we have priorities. And certainly, when you look at the value creation aspect of our priorities, that is something that we think about and contemplate. I think that we will, as we move through the next year and a half, Floris, and we execute on our leasing plan, which we are doing rapidly, we will certainly be always evaluating that, and it becomes more and more compelling, the greater amount of free cash flow that we have distributable. You know, I don't think it's our job to go out and buy small amounts of stock to try to prove a point.
Our job is to execute, lease the space, create value internally, make great allocation decisions as we have over the past couple of years. You know, eventually, either the stock, the value of the business will be reflected, whether that be in the public markets, the private markets, whatever. So I think I don't want you to think we don't evaluate it, because we do, but when we do it, we want it to be material if we do it. And, you know, we would hope that investors who do this for a living would recognize this very quickly.
Floris van Dijkum (Managing Director)
Thanks. John, maybe a follow-up question. I mean, obviously, you put out in your deck. I love the information you guys always provide in your supplemental deck or your investor decks with calls. Significant amount of your leasing over the last three years has had you know higher rent bumps than 3%, and also fixed CAM. And maybe if you could talk about, you know, what do you see as the result of that? What percentage of your existing in-place rents now have, you know, those kinds of escalators and CAM recovery? And what, what's the upside? What does that do to, you know, KRG's cruising speeds in two to three years' time?
John Kite (Chairman and CEO)
Yeah, I mean, the biggest impact to cruising speed would be on the rent side. Obviously, fixed CAM's important, Floris, but when you look at our total revenue, you know, fixed the CAM element, the reimbursement element is probably 20-30% of our total revenue. So we're focused on it. It's impactful, and it's also impactful operationally from the efficiency perspectives and how we differentiate ourselves against our competition. So we are focused on fixed CAM, and it's, you know, in terms of totality, in terms of number of leases, it's probably around 50% of the leases that are outstanding. It grows rapidly by quarter, and it, you know, and I think at this point, people that do business with Kite expect that, and they know that, that is actually better for them, so we continue to grow that.
And yes, it will help, but where it really, really is going to be helpful and more impactful from a time perspective, is on the base rent side. And, you know, that's why we talked about it, and I think we are absolutely the market leader in pushing that. And certainly, when you see that, we gave you the stats about our small shop business. I mean, when 70% of the deals that you've done in one quarter in the small shop business are at 4% or greater, that really indicates that we have a very focused plan organizationally, not just the people that you're talking to on this call, organizationally. So, you know, we're wildly successful on that effort, and that needs to be pivoted also into the anchor space.
And I've been very open about the fact that I don't think it's appropriate that, you know, we, as an industry, have accepted 1% a year bumps or whatever it is, when you do, you know, your discounted analysis of a 10% bump after five years. So that's also a focus, and we're gonna lean into that, and that just has to be the entire industry leaning into that, and I think it will. I think, I think as the supply-demand continues to look like it looks today, you'll see the industry move. So look, this is great.
And, and remember, by the way, you're getting these bumps with very good credit profiles across the board and very durable cash flow across the board. I mean, look at what we've absorbed in the last several years, you know, in terms of the GFC and then Covid. So this business is a great business. It's just kind of I, I just want the investors to recognize it.
Heath Fear (EVP and CFO)
Floris, this is Heath. Also, if you look in our Naples deck, we gave a slide which talks about our cruising speed. You know, currently, we call it 2.5%-3.5% is the cruising altitude. But if you're just able to convert the small shops, like John discussed, you know, within five years, that moves to 2.75%-3.75%. And again, that's not assuming any movement in the anchors. So we're hopeful that ultimately we can see, you know, get the anchors to also make similar moves in their growth rates. But you know, this is planting seeds for better long-term cruising altitude, to your point.
So, really, really pleased, and I think the numbers that John gave here, 70% of our leases in the small shop side have escalators at 4% or above. That's just an incredible change from what we were seeing two years ago. So we are moving in the right direction.
Floris van Dijkum (Managing Director)
Thanks, guys.
John Kite (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Craig Mailman from Citi. Your question, please?
Craig Mailman (Equity Research Analyst)
Hey, guys. Heath, just on the penny coming from same store, how much of that is coming from bad debt versus, you know, just better other operational kind of metrics?
Heath Fear (EVP and CFO)
I think John alluded to it, Craig. You know, about half of it is really related to the same property performance we had in, you know, in the first quarter. Some of that was bad debt-related, and the rest of it is, you know, getting this lease signed up. So that penny is basically split in half between what already happened and, you know, the improved outlook for the balance of the year.
John Kite (Chairman and CEO)
Hey, Craig, one thing I would point to, though, when you, when you look at pace and when you look at where we are kind of sequentially, like, if you look at the sequential base rent growth, you know, we're talking, like, 4.6% sequentially, and even if you eliminate the term fee, it's 3.5%. So going back over the last four quarters, that was a little slow, and now it's accelerating. So that's all part of what's going on here as these, as all this leasing, particularly on the anchor side, which takes time to deliver, delivers. That's why you have to look at the business, you know, over two, three years, not two or three quarters. So I think when we look at it, we feel very encouraged by that sequential base rent growth.
Craig Mailman (Equity Research Analyst)
You know, as you think about kind of comps, I know you guys are pushing fixed CAM, and clearly inflation has. It's still there, but not as maybe aggressive as it was the last two years. You know, with where you guys are setting kind of the growth in that fixed CAM, does that become or is that becoming less of a, or somewhat of a tailwind as you think about comps going throughout the year? I'm just trying to think about, you know, potential levers now that you got the theater done, of further improvements to same store and potentially guidance this year, outside of just, you know, continuing to lease up, which again, it takes time to open some of these new stores.
John Kite (Chairman and CEO)
Yeah, look, I mean, I think if you're only looking at that one metric of same store, then, you know, I think Heath already covered it in his prepared remarks, the three elements that impacted us the most. So, you know, the back half of this year, particularly later in the year, then the same store NOI begins to look a lot like it did last year. It's just a timing thing in terms of that lease up, and we were definitely disproportionately impacted by Bed Bath. We've already, you know, we've already taken care of about 80% of our exposure there, and the rents are great, and the users are way better. So I think look, I think, you know, occupancy is, you know, really matters there.
As we talked about in Naples, you were there, I mean, that's potentially 500-600 basis points to get that when you get that back on track. So bottom line is, you know, you can look at this as if you're purely looking at same store NOI. The profile hasn't changed at all for us. It's the timing.
Heath Fear (EVP and CFO)
Craig, I would say, listen, it's your typical levers. You know, we're here after the first quarter, so what are the things that we're thinking about that we can control or not control? And going forward into this year, you know, can we get continued lower bad debt? Can we get people turned on faster for rent commencement dates? Can we retain more tenants? Can we sign up some spec deals and turn people on later in the year? Can we do better in overage rent? So we've got a lot of levers to pull to improve our entry year.
Then, as John mentioned, looking out into 2025 and 2026 and beyond, just the pure occupancy gains that we have, holding aside any other organic growth, and we said this in Naples, you know, we're looking at a 500-600 basis point contribution from just getting ourselves back to pre-COVID plus, you know, over the next two or three years. So, yeah, we've got things that we're going to be working on the entire year to beat that number we're currently guiding at. And then beyond that, we've got a lot of levers to pull. So we're feeling really good at where we're sitting right now.
Craig Mailman (Equity Research Analyst)
No, that's helpful. I guess, you know, the last question, just as you guys have talked about kind of cost of capital coming down and the flywheel effect of better free cash flow, you know, clearly, there's still pipeline, some of that's some anchor leases there, maybe more CapEx intensive, and then really the occupancy left is more kind of small shop. So as you think about from a timing perspective here, you know, as we get through the next 12-18 months, is that the time frame you think of to think of CapEx kind of normalizing because more of the work you have to do would be kind of small shops?
And then, you know, how do you view, and maybe it's a relative from here, but, you know, you, you've gotten the, the, the benefit of the credit upgrades, and you're a more seasoned issuer, and so you've seen spreads compress there. But just having that higher amount of free cash flow coming in at a lower cost, like, what do you think on top of kind of the higher rents you guys have talked about, but just that, that cost of capital advantage two, three years out will be when you guys think about, you know, whether you go on certain developments or redevelopments or do acquisitions?
John Kite (Chairman and CEO)
Well, big, big picture, focusing on the CapEx. Yeah, I'm looking for. I'm going to find the question in there. But the big picture, Craig, no doubt, when you're spending, you know, over $100 million a year in two consecutive years on TI and LC, and a normal year for you is 60-ish, then, then you are absorbing a lot more of that cash into that, you know, into that TI LC. But it's also, as I pointed out in my prepared remarks, at, like, 30% returns on capital, right? So the free cash flow that comes out of that exercise, you know, in late 2025, 2026, 2027, puts you in a position where there's nothing better than cost of capital from significant free cash flow, right?
That we can deploy in very accretive manner. And, you know, back to Floris's question, if it isn't, if we don't think the place to put it is external, then it's internal, and you're buying back stock with free cash flow, not with leverage, right? So that we can maintain this incredible balance sheet that we have. So the optionality is quite significant, Craig, but yeah, I mean, look, we've got to, we're spending money organically, and we're getting great returns on that organic spend. So I don't think people should be concerned about it. I think they should be happy about the fact that this is a simple business plan, right? And we just got to go execute it.
Operator (participant)
That's helpful. Thanks.
John Kite (Chairman and CEO)
All right. Thanks, buddy.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Linda Tsai from Jefferies. Your question, please.
Linda Tsai (Senior Equity Research Analyst)
Yes, hi. I know at the beginning of the call, you mentioned since 2022, you've executed 53 anchor leases to 36 different brands. Can you give us an update on your box inventory? You know, how much is left, and are any of those getting leased to grocers?
Tom McGowan (President and COO)
Sure. At this point, we have 26 boxes in our inventory today, and we have done a great job not only leasing these boxes, but putting in much better quality tenants with strong spreads and great return on investments on the capital. So, we feel like that's a manageable number. We're looking very closely at how we continue to make progress on that anchor lease percentage. Right now, we're running at, you know, 95.9% on the anchor side. So if you look at our run rates and how we've been able to chip away at the inventory, I mean, sometimes it's between five, 10, 11 boxes, as we're moving through the year. So, we have a good run on it.
We have quite a few properties that are in lease negotiation right now. Just on one segment, we have, you know, five or seven that are ongoing. So, I think the sentiment is very positive, and that is being buoyed by the fact that we have a low demand scenario.
John Kite (Chairman and CEO)
But as it relates to the grocery side, Linda, I mean, definitely, if you just look at our investor presentation, I think we cover it, like, on page 19, just in terms of the new deals that we've done recently. But, you know, Whole Foods, Trader Joe's, Lidl, Total Wine, you know, we've done a couple Fresh Market deals, Grocery Outlet out in the West Coast. So there is real strong demand there, and there continues to be demand across each kind of segment of the grocery business. And I'm sure you've seen a lot of this recent data on when, you know, we've come to the point now where people are shopping multiple types of grocers per week, so they're not just going to one grocer, right?
So if you've got a Kroger, you're going to the Kroger, but then you're going to either Whole Foods or Sprouts or Fresh Market for something, you know, particular, and then maybe you're going to Trader Joe's in addition to that. So I think that's why these guys are continuing to expand, and as we mentioned, now we're, you know, our exposure to grocery is getting up towards 80%. So it's a big part of our business, but again, it's all about your merchandising mix. What's the best thing to bring to that particular center? So yeah, the market is strong as it relates to that, Linda, and that's why I just said on the previous question that we're very happy to be kind of self-deploying capital back into that.
Linda Tsai (Senior Equity Research Analyst)
Thanks. And then on the shop side, you know, it seems like you have a little bit more leeway than some of your peers. Just as you head into ICSC, you know, what are some of the things that you're looking for or expect to hear?
John Kite (Chairman and CEO)
I'll start that and let Tom get to the more meat of it. But look, like we always do, going into ICSC, Linda, we take it very seriously, and I think our leasing people know that we're going in there, and we have an agenda, and it's not, we're not going there to have fun. We're going there to execute. And, I think as it relates to the shop side, the breadth, the depth of the users has really changed in the last, you know, 18, 24 months. The optionality that we see right now and the tenants that are moving from one specific property type into another property type, we're really benefiting from that.
So I think our objective is to continue to do what we're doing, which is not only to sign leases, but to sign leases with embedded growth that reflects the profile that we want, right? So maybe that's why maybe we're taking a little bit longer to lease up space because we are getting, you know, as we said, 70% of the deals we did had 4% or greater bumps. That will pay dividends in the future. So that's kind of the overall macro. Tom, you want to talk about, like, the specifics?
Tom McGowan (President and COO)
Yeah, I think we want to focus on what we call our bread-and-butter type tenants, and, you know, those being restaurants, service, health and beauty. But at the same time, we also want to pay particular attention to new concepts. And, you know, we recently signed some great restaurants that were basically generated out in the Scottsdale area, Culinary Dropout, Flower Child. And, you know, we're dealing with what you may particularly see as some higher-end, smaller mixed-use tenants in Aritzia, Athleta, Nike, you know, Vuori, Warby Parker, et cetera. So we've, as a company, really expanded our breadth and our reach to different types of tenants throughout the portfolio. And as that line blurs and people find the attractiveness of planned retail, we really see that continuing to improve for our company.
So we have a very clear strategy, but it hits a lot of different points and does not ignore any as we move forward.
John Kite (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Connor Mitchell from Piper Sandler. Your question, please.
Connor Mitchell (Equity Research Analyst)
Hey, thanks for taking my question. So you guys have talked a lot about, like, the strength you had on lease negotiations for the industry and focus on rent bumps and fixed CAM. Just wondering if, you know, maybe you could discuss any other levers that you guys haven't touched on, that you're seeing to take advantage of the current environment and maybe increase the cash margin on leases that, you know, we haven't talked about yet?
John Kite (Chairman and CEO)
Sure. I mean, Connor, we're always focused on how we can increase margins, which is probably why we have the highest NOI margin in the business and one of the highest recovery ratios consistently over time. I think, you know, frankly, controlling costs and getting better growth, you know, that's what it's all about, and that's how we create free cash flow. We're already very good at it. We're already the market leader in fixed CAM in the open air space, so we're just leaning into that more. We're not gonna get into specifics about what those you know, what those exact margins are, fixed CAM versus triple net, et cetera. Suffice to say, we're the leader, so that ought to tell you something, or generally close to the top.
So, but you know, the other things that we're doing right now to take advantage of the environment is all the things within the lease, you know, all the things that we look at within the lease. You know, for example, when you look at our overage rent, our percentage rent that comes from sales, it's higher than it's ever been. It continues to be kind of an extra cherry on the top, but it should be because our tenants are doing great when they're paying that percentage rent. That obviously increases margins. And then just how we look at the leases themselves in terms of exclusives and, you know, in terms of co-tenancy requirements, it's a situation where we wanna take care of our customer, but we also have to, you know, take care of the business.
Over time, it's gotten, you know, continues to improve. I don't think people talk enough about when you do business with a company like ours or some others, the retailer themselves would prefer to do business with somebody like us who delivers. It's one thing that you have a space that somebody wants, but it's another thing, how do we reinvest in our properties? How are we, you know, going about that? How you making it very, very attractive to the consumer. So I think retailers appreciate that, and they're willing to pay for that in the right circumstances.
Tom McGowan (President and COO)
Yeah, I mean, the only other one I would add is one of the key goals for our company is, of course, start rent as quickly as possible. We have this machine at Kite that's got pre-development, tenant coordination, project managers, and it's our job to work with all these tenants where they may struggle with permits, et cetera, and run into problems on code issues and really work to get these tenants open as quickly as possible. We don't look at it as just a tenant issue. We look at it as our issue as well. Another big point of trying to generate that revenue earlier.
Connor Mitchell (Equity Research Analyst)
Okay. Appreciate all the color there. And then, bad debt was the guidance was brought down. And just kind of thinking about some factors from the past, you know, Bed Bath and Jo-Ann seem to be relatively seamless for the industry. Is there any chance, like, we could be getting lulled into a sense of false fewer credit issues or, you know, maybe the sector's ability to wrangle troubled tenants?
John Kite (Chairman and CEO)
Oh, I don't know about that. I mean, you know, we're as we laid out in our prepared remarks, I mean, when you look at the first quarter for us, if you excluded prior periods, you know, we were around 90 basis points. So the bottom line is, you can say when you exclude prior periods, but that's part of our business. We're always collecting. We just don't wanna, you know, project that because it's volatile. So you know, if you're assuming that bad debt's around 1%, and you're always gonna be collecting something, that's probably pretty stable. So I don't think we're being lulled.
It's a function of the fact that supply and demand is putting us in a position that, you know, tenants wanna be in these spaces, and they're gonna do everything in their power to continue to stay there, which means pay rent. So I don't think that it's particularly different, but it's better. Look, the reality is it's better, but right now we're being conservative and looking at the back half of the year, and we'll see where it shakes out.
Connor Mitchell (Equity Research Analyst)
Okay. Appreciate it. That's all for me.
John Kite (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Lizzy Doykan from Bank of America. Your question, please?
Lizzy Doykan (Equity Research Analyst)
Hi, everyone. I was hoping to get more color on the leasing spread on option renewals in the quarter, which looks like, you know, that compressed for the third straight quarter. And when I'm looking at, you know, the past four quarters, it looks like option renewals made up over 60% of the comparable space that's been executed. So just wanted to see, you know, what what's going on there, what what's sort of been happening in the renewal discussions you're having with tenants, and maybe why is this proportion not coming down? You know, maybe are you signing renewals with fewer options?
John Kite (Chairman and CEO)
No. So, well, first of all, we're not having a lot of discussions on an option renewal because the tenant is just hitting an option. So, let's start there. And if you have a particular quarter, where you have multiple anchor options, you know, anchors hitting options, generally speaking, those aren't, those are lower. So I think a lot of it's timing, and over the last couple of quarters, I think we've probably had more anchors. I'm not looking at the data in front of me. But it really comes down to mix. What is the mix per, you know, per quarter? It's kind of why we talk about non-option renewals. And, you know, when I look, you know, over the past, I think, two and a half years, the non-option renewals have been 12%.
So our goal is to have less options. I mean, you know, it's part of our strategy around new leasing and, you know, containing the options, and if the options do exist, that we have to get the appropriate rental increases in those options. But it would be pretty focused on the anchor side, and that's it.
Lizzy Doykan (Equity Research Analyst)
Okay, thanks. And then back to Heath's comments on the 500-600 basis points of occupancy build that's expected over the next 2-3 years. Just curious on how much you think that would be weighted towards anchors versus small shops, and then maybe, you know, is there thoughts around the cadence over which that would happen, whether that's the most weighted in the back half of 2024 versus 2025, 2026? Thanks.
John Kite (Chairman and CEO)
Well, I'm sorry. In terms of the, it's, it's probably gonna be basically what our revenue is, 50/50, right? 50% of our revenue comes from shops, 50% from anchors. Timing-wise, Heath, do you wanna?
Heath Fear (EVP and CFO)
No, I mean, listen, we we're looking out to our model, I think I'll stick with the two-three years as a timing. Again, it's getting us to sort of pre-COVID levels. But, you know, based on the velocity that of the leasing activity that's happening now, based on what we're seeing in this quarter as well, feeling better about that being closer to the two-year mark than the three-year mark, but I'll leave it at that in terms of in terms of the timing of that.
Lizzy Doykan (Equity Research Analyst)
Okay. And just one more from me. It looks like you guys pulled down your interest in Glendale Apartments. I think that was the only transaction made in the quarter. It seemed pretty quiet other than that, but just seeing what the rationale was there, and if there's any other opportunities to make note of when it comes to dispositions.
John Kite (Chairman and CEO)
Yeah, pretty simple. You know, that was a great first of all, it was a fabulous deal, where we took a parking lot, contributed the parking lot into a partnership, got a 12% interest, and made $2 million. So we'll keep doing that as long as we can keep doing that. You know, and I think our partner, who is obviously the primary partner, the multifamily developer, thought that the timing was right to monetize, and we agreed. So I think we will continue to look at those opportunities as we move forward. The multifamily side of our mix of NOI continues to grow. It's small, but it's growing. You know, we have a to the sale of this asset, we have an equity interest in around 1,700 units, and, you know, we're obviously doing more.
And I like the way that we go about it in terms of trying to limit our capital into each deal, but yet, you know, thinking about IRR, obviously, this was a tremendous IRR, tremendous return. So I think we'll continue to do that. We have a couple projects that we're working on, and generally speaking, you know, we're gonna probably max out around 50% ownership, but it'll depend on each individual deal.
Heath Fear (EVP and CFO)
Just to put some numbers, the IRR was 22%. The return on equity multiple was 1.8x, and that's before the benefit of a $7 million TIF, which Kite was the sole beneficiary of. So again, if we can find more of those, you know, we're ready to go. It was a grand slam is an understatement for that particular deal.
John Kite (Chairman and CEO)
Not to drone on about it, but it is another example that I want people to think about as it relates to our particular space and what you can do with retail real estate, which is very, very different than a lot of these other sectors that seem to be very crowded trades, where all this money goes, but yet the reuse of the real estate is extremely limited, right? It is a very specific piece of real estate, data, industrial, whatever.
Our real estate is so fungible, it's got so much flexibility, and it when you're sitting on a piece of property that's an unused parking lot, that can, you know, can be a 22% IRR, that should tell you that the stuff that we own, you know, probably in the sector, but particularly to Kite, is really, really attractive. So good, good small example that I think people should think about.
Lizzy Doykan (Equity Research Analyst)
Great. Thank you.
Operator (participant)
Thank you. One moment for our next question. And our next question comes from the line of Hongliang Zhang from JPMorgan. Your question, please.
Hongliang Zhang (Equity Research Analyst)
Yeah. Hey, guys. I guess it looks like small shop occupancy declined slightly in the first quarter compared to the fourth quarter. Was there anything specific that drove that, or is that just seasonal friction?
John Kite (Chairman and CEO)
It's really seasonal. I mean, same thing happened last year in the first quarter. It was almost the exact same as it, 30 or 40 basis points last year. So it's really timing. You know, when we look at our pace, our pace is good. And look, I think we did make, we're trying to make a pretty significant statement around the type of shop leasing that we're getting is a little different than everybody else, maybe. You know, I don't hear a lot of other people talking about 4% bumps. So, you know, I think it's timing.
Hongliang Zhang (Equity Research Analyst)
Got it. And when you talk about occupancy going back to pre-COVID levels the next two-three years, is that on a lease basis or an economic basis?
John Kite (Chairman and CEO)
It's a lease basis, but it would be both. I mean, ultimately, it flows through the economic occupancy as well. And, you know, from my personal perspective, you know, three years is probably a long time frame, but I would say within that. But, yeah, I mean, we're very focused on maximizing the portfolio, but a little less focused on the timing of that.
Hongliang Zhang (Equity Research Analyst)
Got you. Thank you.
John Kite (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Anthony Powell from Barclays Capital. Your question, please.
Anthony Powell (Equity Research Analyst)
Hi, good afternoon. Just one for me, a question on some of the coastal gateway exposure you bought in the, in RPAI deal, Seattle, D.C., New York. I know there's been discussion about whether you keep those long term. Maybe talk about how those are performed and where, where you see them kind of fitting your portfolio over the long run.
John Kite (Chairman and CEO)
Sure. Look, I think, I think we've, we've been clear that we think we have a unique kind of footprint, and we like the footprint. Obviously, the great majority of our revenue comes from the Sun Belt, but we think that the kind of the gateway markets that we're operating in, particularly New York, D.C., Seattle, are very attractive markets that our retailers want to, you know, grow and expand in. That being said, you know, we're always analyzing, does it make sense to operate in, in a, in a particular market? And certainly, you know, the coastal markets, you know, have their challenges as it relates to the things that we talked about around, you know, the tax status of each individual state and the business friendliness of each individual state, right?
So it is something that we're monitoring and talking about, and it. I'm not, I would never take off the table that we would look to make changes, but we're never gonna make a change just to make a change. It has to make sense economically, and right now, we're happy with the footprint, but, you know, we're always analyzing it.
Anthony Powell (Equity Research Analyst)
Okay, great. Thank you.
John Kite (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Wes Golladay from Baird. Your question, please.
Wes Golladay (Senior Equity Research Analyst)
Hey, guys. Looks like there's about a $4 million increase in leases opening this year, including the $6 million that opened in the first quarter. Is the SNO opening faster? You pull anything from 2025, or is it just the new leasing that you're signing this year that's opening later in the year that is driving this?
John Kite (Chairman and CEO)
Yeah, Wes. So, I'm sorry, can you, can you repeat the question again? You're a little muffled.
Wes Golladay (Senior Equity Research Analyst)
Oh, yeah. So you have about,
John Kite (Chairman and CEO)
Yeah
Wes Golladay (Senior Equity Research Analyst)
$4 million more in your SNO, including the leases that opened this year. Yeah, I'm just curious if that' and the, the theaters, obviously, and that's gonna be a small part of it, but I'm just wondering what is driving the $4 million increase in the SNO this year opening? Is it the SNO?
John Kite (Chairman and CEO)
Sure. That, That's all new leases, Wes.
Wes Golladay (Senior Equity Research Analyst)
Okay. Yeah.
John Kite (Chairman and CEO)
So all the new leases are signed up. Yeah, that's just new leases opening greater than
Heath Fear (EVP and CFO)
Correct
John Kite (Chairman and CEO)
you know, the leases that in the previous quarter.
Wes Golladay (Senior Equity Research Analyst)
Okay. And then you also added some new disclosure in your AFFO, the amortization of debt discount, premium and hedge instruments. Is the $3.8 million a good run rate going forward for this year?
John Kite (Chairman and CEO)
Hold on one second, Wes. I have that answer right here. For the run rate, yeah, it's, it's directional.
Wes Golladay (Senior Equity Research Analyst)
Okay. Thanks a lot, guys.
John Kite (Chairman and CEO)
Yep.
Operator (participant)
Thank you. One moment for our next question. And our next question comes from the line of Paulina Rojas from Green Street. Your question, please.
Paulina Rojas (Senior Equity Research Analyst)
Hello, everyone. My question is about the transaction market. So, treasury yields have rebounded. Have you seen any change in cap rates, given the higher base, any change in investors' appetite to transact, especially in the last month, really?
John Kite (Chairman and CEO)
No, I, I don't think so, Paulina. I mean, I think, look, the reality of. We're kind of in a place right now where were the market is finding stability. So sure, the, you know, the curve has changed a little bit in the last 30 days, and the 10-year, you know, at 4.60, 4.70 versus four. But the reality is, I think the majority of the investment community believes over time that that will stabilize lower. And when you look at the rent growth and the NOI growth that people are getting, particularly if something has upside associated with it, I think the IRRs are very comfortable.
Heath Fear (EVP and CFO)
And my personal opinion is, as we move into next year, you probably see the ten-year begin to settle in the lower four range. This is just my personal opinion. And when you're, you know, when you can buy something at a six that has 2-3% growth embedded, has some upside, you know, that's a great return. So I think probably back half of this year, you'll probably see it accelerate even more. Again, this is all my personal opinion, but we haven't seen anything slow down because of the volatility over the last month. And quite frankly, the fact that we're tethered to that is unfortunate.
And, you know, I wish, I wish people could look beyond that, and I, I particularly wish the Fed would think about a range of inflation versus one hard number that just doesn't make sense, against an unemployment market at 3.5%. So one of these days, maybe they'll take my advice, but not, not, not looking, not looking really, I'm not betting it on DraftKings, let's put it that way.
Paulina Rojas (Senior Equity Research Analyst)
Okay. And then you mentioned a drag on expenses net of recoveries that had to do with the timing of some of the recoveries. So overall, what's your expectation for this line item for the year? And I think the easiest way for me to see it is if you expect it to be a contributor to same-property and like growth, or not?
Heath Fear (EVP and CFO)
So the expenses in the first quarter, Paulina, they were again, this is just timing, and so we had higher expenses. And you'll see it a little bit, you'll see a little bit of a dip in our recovery ratios because, you know, because of the fixed CAM. But as the, you know, as the year goes on, we'll see that expense normalize. So again, it was just the timing of, you know, sort of front-loaded first quarter expenses.
John Kite (Chairman and CEO)
Yeah, in terms of I mean, look, it's particularly around real estate taxes. So if we have previous years' experience in real estate taxes, it's probably a contributor. But, you know, we've got to wait and see when we get into the end of the year.
Paulina Rojas (Senior Equity Research Analyst)
Okay. Thank you very much.
John Kite (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Dori Kesten from Wells Fargo. Your question please.
Dori Kesten (Equity Research Analyst)
Thanks. Good afternoon. Heath, can you talk about how the Moody's upgrade may benefit your interest costs going forward, and just when you may look to address your 25s?
Heath Fear (EVP and CFO)
Yeah, listen, I don't know I can put an exact, you know, spread differential on it. It certainly helped. You know, we had two great things happen to us: one, Moody's upgraded us, Fitch put us on positive, so we're hopeful that they'll move to BBB+ soon. And then S&P, you know, they put us to a positive outlook as well, and again, we're hopeful that we'll mature into a pure BBB rating over the next couple of quarters. So all those things combined will certainly help compress it. Listen, you know, we issued back in January when, you know, the ten-year was around 3.90 and the spread was, like, 170 over. Current indicatives have us somewhere between 140 and 150, so we're certainly seeing some compression.
As we go into the market more often and our bonds become more liquid, we only see that getting better and better and better. So, you know, in terms of timing of when we're going to address the 25s, listen, we're going to be opportunistic. I think we've been really good at sort of looking at the macro environment and picking our spots. I think now, you know, in hindsight, when we picked that day to, to trade in January was a really good time. It was before the ten-year started to, to gap out again. And so we're going to, you know, do our best to sort of read the macro cues and, and pick a good spot when we think we can also do another nice print.
So I would say, you know, late 2024, early 2025 is when we'd look to be looking to address those maturities.
Dori Kesten (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you.
John Kite (Chairman and CEO)
Thanks.
Operator (participant)
This does conclude the question and answer session of today's program. I'd like to hand the program back to John Kite for any further remarks.
John Kite (Chairman and CEO)
Just want to say thank you to everybody for tuning in today, and thanks for the interest in the company. Really looking forward to hopefully seeing a lot of you in Dallas in a couple of weeks at our Four in 24, where we're going to see some really awesome properties. I would also say, please take a look at the stock because it is incredible value. Thank you very much.
Operator (participant)
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day!