KRG Q2 2024: Leasing Costs Persist into 2026, Delaying NOI Growth
- Strong Balance Sheet & Low Leverage: Management highlighted a 4.8x net debt to EBITDA leverage and $1.3 billion of available liquidity, providing flexibility to deploy capital into growth opportunities without over-leveraging the balance sheet.
- Attractive Leasing Environment: Robust leasing dynamics—including consistently rising lease rates, improved retention, and active backfill activity—support ongoing rent growth and a solid operational outlook.
- Strategic Dispositions for Capital Reallocation: The sale of non-core assets (e.g., Ashland & Roosevelt in Chicago) demonstrates management's focus on shedding non-core properties to reallocate capital into higher-growth opportunities.
- Elevated leasing costs and extended lease commencements: Executives noted that leasing costs remain high for 18–24 months—with some indications it may extend into early 2026—due to the lag from lease signings to openings. This delay could depress near-term occupancy and delay revenue and AFFO growth.
- Uncertainty in same-store NOI growth drivers: Although guidance improvements were partly attributed to lower bad debt and asset removals, the reliance on these factors means that any failure in achieving expected bad debt improvement or retention enhancements might lead to weaker same-store NOI growth, pressuring future free cash flow.
- Potential backfill challenges for non-core asset dispositions: The Q&A highlighted uncertainty regarding the timelines and execution of re-leasing for properties previously held as non-core (e.g., Stop-and-Shop sites). Delays or difficulties in filling these vacancies could further pressure occupancy rates and cash flows.
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Leverage & Pricing
Q: Has stronger credit changed your leverage and pricing?
A: Management highlighted that with 4.8x net debt/EBITDA and nearly $1.3 billion liquidity, they have substantial flexibility. They are not actively increasing leverage now but remain open to opportunities, with current tenure pricing around 145 bps ±10 bps. -
NOI Guidance
Q: Why lower NOI in Q3, then a rebound in Q4?
A: They explained that a strong prior-year comparison and one-off items in Q3 led to a temporary moderation, while easing comps and new lease commencements should sharply boost NOI in Q4. -
Asset Disposition
Q: Why sell Ashland & Roosevelt and what cap rate?
A: Management retained that the asset was no longer core, allowing redeployment into more attractive markets. They noted cap rates in recent trades have been in the mid-high 5s to low 6s. -
Leasing Costs
Q: How long will elevated leasing costs persist?
A: They indicated that due to phased quarter‐by‐quarter leasing and the time needed from signature to opening, elevated costs are expected to continue potentially into early 2026. -
NOI Drivers
Q: What drove the revised same-store NOI growth?
A: The increase was driven by lower bad debt, improved tenant retention, and the removal of a held-for-sale asset, resulting in about a 50 bps upward revision. -
Cap Rate & Sales
Q: Will cap rate compression drive more noncore sales?
A: Management noted that cap rates have compressed significantly due to market stability and liquidity. While they are opportunistic in balanced trades, any noncore sales are carefully evaluated to avoid AFFO dilution. -
Lease Spread
Q: When will the leased-occupied spread narrow?
A: They expect the spread to decline gradually, nearing around 250 bps by the end of next year, though it will remain elevated over the next three quarters. -
Store Closures
Q: What’s the update on the two Stop-and-Shop closures?
A: Management mentioned that activity is ongoing for backfill, with further details and final timelines to be provided as deals progress. -
Small Shop Bumps
Q: Why do some small shop leases have lower rent bumps?
A: They explained that while 70% of new leases achieve bumps of ≥4%, variations reflect specific tenant credit profiles and deal dynamics, which are addressed case by case. -
Consumer Spending
Q: Is weak consumer spending affecting centers?
A: Management stressed that strong balance sheets of major national retailers and robust demand have insulated their centers from any consumer spending softness. -
Re-lease Timing
Q: When will Bed Bath re-lease boxes start paying rent?
A: They expect some boxes to come online this year with additional ones in 2025, with about 4 locations likely activating by late 2025 or 2026. -
One Loudoun Spend
Q: What about the investment spend and returns at One Loudoun?
A: Details on the total investment and expected return timing are being reserved for announcement at the upcoming event in September, with specifics to be shared then.
Research analysts covering KITE REALTY GROUP TRUST.