Kite Realty Group Trust (KRG) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q1 2021 Kite Realty Group Trust Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Bryan McCarthy. Please go ahead, sir.

Thank you, and good morning, 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 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 are 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, Jason Colton.

I'll now turn the call over to John.

Thanks, Bryan, and good morning, everybody. Thanks for joining us today. Spring's here, and we're feeling particularly optimistic, and it really doesn't have anything to do with the improving weather. For the first time in over a year, the news regarding COVID is predominantly positive. As we sit here today, over 50% of adults in the U.S. have at least one vaccine shot. And at the current pace, there's potential for 90% of adults in the U.S. to be vaccinated by summer. We realize that the global progress against the pandemic is uneven, but I am very encouraged on what we're experiencing here on the home front, especially in our target markets.

Our tenants are open and operating. Our collections continue to be sector-leading, up to 97% this quarter, and the velocity of demand for our well-located centers is accelerating.

We had another very strong quarter of leasing, signing over 426,000 square feet of space at blended lease spreads of 12.2% and 6.4% on a GAAP basis and cash basis, respectively. Excluding a single strategic anchor renewal, we realized blended leasing spreads of 16.7% and 10.5% on a GAAP and cash basis, respectively. As we mentioned on our last call, the strong leasing will cause the spread between our leased and occupied rates to widen. Our current signed-not-open NOI is approximately $10 million, which will come online in late '21 and early '22.

Another impressive aspect of the new leases is the quality of tenants we are signing. This quarter, our portfolio gained another Total Wine & More at Cool Creek Commons in Indianapolis and another ALDI at our newly acquired Eastgate Crossing Community Center in Chapel Hill. The latter addition makes Eastgate Crossing a very unique dual grocery-anchored center, with ALDI joining the existing Trader Joe's. As we told you last quarter, we've got great expectations for Eastgate Crossing and all of our assets in Raleigh.

Speaking of Raleigh, as I'm sure you've all heard earlier in the week, Apple announced the creation of a $1 billion East Coast campus in the Research Triangle Park located in the Raleigh-Durham MSA. KRG will be a direct beneficiary of this announcement, as we own Parkside Town Commons, a 350,000 square foot Target and Harris Teeter-anchored center, that is adjacent to the future campus. Assuming an average salary of $187,000, the 3,000 new employees will generate over $550 million of annual spending power. Not only is this great news for Parkside Town Commons, it reinforces the migration to warmer and cheaper markets such as Texas, Florida and North Carolina. We're even seeing this play out in the reallocation of congressional representatives with those same 3 states adding seats.

With the announcement of the Weingarten and Kimco merger, KRG is now the most compelling way to directly invest in Sunbelt open-air retail real estate. 78% of our ABR is located in the South and West. Our next closest peer has less than 50% of their ABR in those same markets. We're proud that our strategy is paying dividends, and we continue to prudently look to expand our exposure to these markets.

As we discussed on our fourth quarter call, we partially match-funded our Eastgate acquisition by selling 17 ground leases for a combined $41.8 million. One outparcel is awaiting final subdivision approval and should close next quarter. This trade demonstrates our commitment to maintaining our low leverage, while at the same time, acquiring accretive opportunities.

In terms of our portfolio leased rates, we believe we're at or near the low watermark. On the anchor front, we've already executed 4 leases and are negotiating multiple leases on the remaining 23 vacant boxes. Anchor Acceleration is off to a very strong start.

You can see the economic opportunity on Page 21 of our investor presentation. As we discussed last quarter, assuming the current ABR for our in-place anchors, there's a potential mark-to-market of nearly 20%. To increase transparency, we've added Page 22 in the investor -- in the Supplemental, so you can track our progress as we lease up boxes. The 4 leases signed to date have achieved a 12% lease spread and over a 40% return on capital. These metrics also provide confirmation that KRG remains focused on return on capital, not buying up lease spreads. As we said before and I'll say again, we're very focused on maximizing total return to our stakeholders.

We believe the market does not fully appreciate the potential upside in our NOI given the robust current leasing environment. Please keep in mind that while KRG had some of the highest occupancy dislocation in our sector, our revenue decline was one of the lowest. This means that low-paying, often dying tenants have finally left our centers. Not only should this enable us to outperform when it comes to NOI growth, but it allows us to create value by upgrading tenancy which often results in cap rate compression for the property.

In order to demonstrate the potential magnitude of this re-leasing opportunity and what it can mean to KRG's forward NOI, we've provided new detail on our investor presentation. As shown on Page 4, we have the potential to increase our NOI by roughly 14%, simply by leasing up vacant space to pre-COVID levels at current portfolio ABR. Please note we aren't saying that's a guaranteed outcome on providing any sort of forward guidance. We're simply doing the math using information from our supplement to show investors what's possible.

Before I turn the call over to Heath, I want to again thank the entire KRG team, and I really can't express enough gratitude to the men and women of KRG. The strength of our operations is impossible without them. There are very good times ahead for KRG, and I cannot wait to see what the future holds for us.

Now I'll turn the call to Heath.

Thank you, John, and good morning, everyone. I want to echo John's enthusiasm for the momentum we are seeing in our industry, especially as it relates to leasing. I'm equally enthusiastic about some of the structural changes we see coming out of COVID. Many retailers have a renewed appreciation for the value of brick-and-mortar locations, realizing the importance of these distribution channels as they reimagine their supply chains.

Another pleasant surprise we are experiencing as we emerge from the pandemic is a change in the national narrative. Over the course of a decade, we have steadfastly maintained that the relentless reports regarding the depth of retail were greatly exaggerated. Well, it seems the financial pundits are finally starting to acknowledge the value of retail real estate.

Turning to our first quarter results. We generated $0.34 of NAREIT FFO, and we also generated $0.34 of FFO as adjusted. As a reminder, last quarter, we guided to 2021 FFO on an as-adjusted basis so as to reduce the noise associated with 2020 receivables and 2020 bad debt.

By way of example, to the extent we are unable to collect any of the 2020 accounts receivable, it will become a bad debt expense in 2021, but it will be excluded from our FFO as adjusted. The same holds true in the reverse. As we continue to collect 2020 bad debt, we will recognize that as revenue, but it will also be excluded from our FFO as adjusted. As set forth on Page 17 of our supplemental, the net 2020 collection impact in the first quarter was de minimis with the collection of $2.2 million of prior bad debt, offset by $1.9 million of accounts receivable we've now deemed to be uncollectible.

There are other several notable items on Page 17 of the supplemental that demonstrate our improving fundamentals on a sequential basis. Total bad debt to this quarter was $1.6 million as compared to $2.6 million for the fourth quarter of 2020. Our first quarter recurring revenue has ticked up compared to fourth quarter of 2020. As for accounts receivable, we collected $5.8 million that was outstanding at year-end, including deferred rents. Today, total outstanding deferred rents stand at $3.5 million, down from $6.1 million at year-end with only $30,000 delinquent to date. With respect to our Small Business Loan program, the total balance is down to $1.4 million and not a single tenant is delinquent. Needless to say, these are all encouraging signs regarding the health of our tenants.

Last quarter, we did not give same-property NOI guidance as we don't feel like this is a meaningful metric in light of the pandemic-impacted 2020 results. Our same-store NOI growth this quarter is negative 2.9% as a result of COVID-related vacancies. This includes the benefit of approximately $800,000 of previously written-off bad debt that we collected in the first quarter. Excluding those amounts, our same-store NOI would be negative 4.5%. That 160 basis point difference is just noise from 2020 and is precisely why we didn't provide guidance on this metric. While we are committed to reporting this number, it is best taken with a grain of salt.

Our balance sheet and liquidity profile remain solid. Our net debt-to-EBITDA, pro forma for the ground lease dispositions, was 6.6x, down from 6.8x last quarter. During the first quarter, we issued $175 million of exchangeable notes due in 2027. These notes have an interest coupon of 0.75%. In conjunction with these notes offerings, we entered into a capped call transaction to increase the conversion price of the notes to $30.26. The proceeds of this transaction will remain on the balance sheet to retire the 2022 mortgages as they become due next year. Excluding future lease-up costs, we have only $15 million of outstanding capital commitments and have roughly $420 million of liquidity. We are extremely pleased with the execution and the added flexibility this delivers to our balance sheet.

We are raising our 2021 guidance of FFO as adjusted to be between $1.26 and $1.34 per share. This guidance assumes full year bad debt of approximately $7.6 million and no additional material transactional activity.

We are in the early stages of the recovery. And while we have put some points on the board, we still have room to run. We have an envious balance sheet, a best-in-class platform, a strong portfolio of assets and a market strategy that continues to pay dividends.

Thank you to everyone for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

(Operator Instructions) Your first question comes from the line of Floris Van Dijkum from Compass Point.

Wanted to maybe talk or have you describe a little bit more the opportunity at Parkside Town Commons. Is there expansion possibility? Are you just -- does that center need refreshing? Does that have outparcel opportunities to take advantage of the additional demand? Or what kind of impact do you think that could have on rents there and on tenant demand?

Well, Floris, high level, I mean, it's an existing shopping center that we developed ground up. It's a stabilized property, although it does have some lease-up opportunities and some potential to grow as it relates to outparcels. But I think -- and I'll let Tom handle that in a sec. But in terms of the overall macro there, I mean, it's really an opportunity for us to kind of highlight what's going on in that market and the growth that it's experienced since we've been down there. And frankly, we own, I don't know, just under 1 million square feet in the Raleigh-Durham Metro MSA. So it really, for us, is the bigger opportunity to continue to look to expand there.

But as far as the particular property, Tom, you want to talk about that a little?

Yes. First of all, we purchased the property quite some time ago with the vision of the park going to continue to expand to the south, so little -- few numbers for you to think about. It's the largest park in the country. It's got 300 companies, 55,000 employees, over 7,000 acres. So it gives you a sense of the mass scale.

And the key to this is we have a main drive, O'Kelly Chapel Road, coming through the center of our project that then intersects with the park up Louis Stephens Drive, which really draws the vast majority of these tenants and businesses down to our parcel. And when we did this and worked with Research Triangle Park, our parcel was really considered their southern anchor of services. So this has all come to fruition and the fact that Apple is coming is incredible. This mixed-use project, we've got close to 300 apartments. We've got great tenants with Target, Harris-Teeter, et cetera. But we do have expansion comp -- possibilities that would be on the reuse side. So we're in the process of looking at that, but we feel like this property is going to benefit from this massive economic machine from the north.

And Floris, this is Heath. I'll also mention it's not only just about Apple having their location there. It's also about their vendors, so we think there's going to be a huge uptick in office demand and also hotel demand. Because, again, once Apple arrives, their vendors will follow. So it's going to be a multiyear tailwind for that area.

Maybe one other question, if I may. You guys are talking a little bit about the upside potential in NOI here, which seems pretty strong. How do you guys feel about what has happened with -- and maybe, John, if you could comment on the Weingarten transaction. And how does that -- how do you think that positions you at Kite as potential buyer or seller? And how do you think -- or what does that mean for values in the shopping center space?

Floris, I think through and through, it's a good transaction. It's clearly a good look through in value. And as we mentioned on the prepared remarks, it certainly highlights, I think, the strength of our portfolio and what the value of that would be in a transaction. So it's very, very difficult to assemble high-quality, open-air retail in the markets that we're in and which we highlight as the South and West. It's very difficult to get those assets. And when you can, obviously, they trade in the 5s. I think we've seen that. So I think it's an excellent opportunity for everyone to kind of check what they're thinking.

And then in our case, maybe even a little more so than what the Weingarten case was we have significant continual upside in this really pretty straightforward leasing program. I mean when we're at below 91% overall, that's a lot of runway for a company that's been 95%, 96% for a long time, pre-COVID. And when you look at the rents that we have in our portfolio, and really, I'm just telling you what you can find on Page 4 of our investor presentation, there's a lot of room to run here on pretty conservative valuations.

So I think it's a positive. I think it was a great transaction for everyone involved. And look, these assets are very hard to come by, so I get it. I understand the thought process there. So all in all, it's all positive, Floris.

Your next question comes from the line of Katy McConnell from Citi.

Can you provide some color on the additional anchor space that you got back during the quarter and the potential upside there? And when should we expect to see a meaningful ramp in anchor occupancy based on your releasing process?

Yes. Sure. I mean we -- basically, in the additional anchor space we got back was kind of a combination of a couple of expirations and then frankly our wanting to take space back. So this is really more in line with what our overall program is, which is to get spaces back that we think the tenants aren't right for the property and are struggling a little bit, and we want to bring down our exposure to people like that. So very positive in that regard.

In terms of, as I said on the call, my view of this is that -- and Tom can enlighten a little bit, if he'd like to. But my view on it is we're pretty close to the bottom of that, Katy. It's pretty close to that -- this quarter, next quarter. But really, we're much more focused on the fact that we have 10 more deals that we think we can do in the near term, maybe 8, I don't know. But we've got a lot going on in the hopper in terms of negotiating leases and LOIs. And there's just a ton of volume. There's a lot of really interesting things going on, and it really just circles back to the fact that there just is no -- there's very limited inventory of this high-quality, open-air retail, and a lot of tenants are focused on open-air, high-quality retail. And as I -- just nothing been built for 10 years. So when you own stuff like we do, you get a lot of phone calls.

Tom, do you want to add to that?

Yes. I mean I think one example of this is the 2 leases that we signed here just recently with ALDI and Total Wine. These both replace former Stein Marts - completely unproductive. We'll say they're somewhere between $5 million and $6 million of sales, and we're going to transpose those into tenants that are going to be doing $15 million to $20 million, better credit, better co-tenancy. So each one of these, we're looking at it as a net positive. And so far, we've been very successful of replacing them with much higher tenants that drive greater traffic to the projects.

Okay. And then you've seen pretty favorable trends in Sunbelt markets throughout the pandemic, so I'm curious if you can just comment generally on overall transaction market trends and if you're seeing any compression in cap rates in deals as a result.

Yes. I mean, no question that these are -- the markets that we're in are pretty hot, and it's something we've known for a while. And I think now we're reaping the benefit of that strategy of that shift that we made a few years ago. I think the easiest look through, Katy, is the public comp, which is the mid-5 cap that was talked about in terms of the Kimco-Weingarten deal. That's probably your easiest look through, the most comparable that I would think that's a public print.

In terms of the private market, that's what we said on the last call. I mean you just can't find properties that we own or want to own at cap rates that aren't somewhere in the 5s, maybe a very low 6%, depending on the deal, but you just can't find them. And look, there's more product coming on the market, but that's where the cap rates are. And it makes sense because the unlevered IRRs that you can produce buying assets in that range are still very good, unlevered IRRs in today's world, especially when you look at the durability of the cash flows.

And we've proven that, I think, better than anyone. 97% rent collection is obviously almost back to exactly where we were pre-pandemic. We're very close to that now. So -- and that is a direct correlation of the quality of our real estate, as we've said, and the quality of our people and the way that we go about our processes. But these assets are definitely sought after.

Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

I just wanted to follow up first on investments, and I just wanted to ask specifically about your appetite to invest here. Are there more deals like Eastgate available? And sort of what's the outlook like for transactions, in general, as we move further throughout the year?

Sure, Todd. And yes, I think we definitely -- as we said in the last call, we are very active in understanding everything that's going on in our target markets. And that includes what properties that we think we would like to own, what properties are available, we think might be available, or we'd like them to become available. So we're very focused on that.

We're in the enviable position of having a very strong balance sheet, very, very strong liquidity and limited capital needs over the next few years, other than what we've identified in terms of our lease-up program.

So yes -- the answer is yes. We are actively engaged and always looking at opportunities. I think we'd be very -- we're very selective in that because of the way we've curated the portfolio. That said, I do think there are other opportunities like Eastgate out there. And if we find something or things that would meet that criteria, we believe we're in the position to take advantage of it and not everybody else is. So that's a nice place to be. But it's kind of -- we'll take that on a case-by-case basis, Todd. But certainly, there's more today than there was 6 months ago.

And Todd, this is Heath. I'd also just want to mention, obviously, as we're looking at acquisitions, we're also keeping an eye on our leverage. And so it's not our plan to obviously undo all the hard work we did in 2019 involving our balance sheet. So yes, we'll look at opportunities, but we'll be responsible about it.

Okay. More generally, I mean, do you think that we've seen a couple of larger public-to-public transactions here? But thinking about the environment, stepping back, I mean, do you think that there could be some smaller portfolio, some larger-scale transactions coming to market and getting done in the retail space? Do you expect that type of activity to continue relative to what we've seen in prior years.

Yes, Todd, I think assuming the world kind of stays on the trajectory that it's on, I would think that there's going to be other things happening. And as I just said in the previous question, there's this very limited supply of this type of product that we own and a few others own.

So I do think when there's opportunity to get scale with that, that makes sense. As long as Heath said, that you're doing that with the eye on your balance sheet. And look, we've worked pretty hard to get one of the best liquidity profiles in the sector. And so that's important to us. But yes, I do think that there's an opportunity for people to start thinking that way, and I do think people are thinking that way, but time will tell.

Okay. And just one last question on the decrease in the portfolio lease rate and occupancy a little bit, sounds like things are starting to stabilize. As you look at the leasing pipeline and the lease-up of vacant anchor and shop space going forward, how quickly do you think it might take to capture some of the upside that you're discussing and that you've outlined? And do you think that the environment today is such that the process to sign leases, get tenants in and paying rent is any faster or accelerated compared to prior periods? Or is that not what you're sensing today?

I think we've said this before. The trajectory of leasing anchor spaces really hasn't changed in terms of the timelines associated with getting the space back, getting it leased and getting it to commence rent, which, on average, is probably 18 months to do that.

As I said in the call, and Tom alluded to as well, we have a lot of deals in the pipeline right now. As a matter of fact, we do a weekly, what we call a REC Approval Committee, which is our Real Estate Committee. We have a meeting on Monday that has 16 deals on the docket, so that gives you an example of the level of activity. So that will be a long day for all of us, but it will be a good day.

So Todd, I think that's the same. The difference is there's just a tremendous amount of interest, particularly, again, in the markets that we're in. We're not the only ones that realize the strength of these markets, obviously. So -- but when you look at the -- as I said, the $10 million of -- that we have coming in terms of leases that are signed but not yet occupied, the majority of that comes at the end of this year and some into the beginning of '22. So that kind of tracks this timeline that we've been talking about.

We have your next question, coming from the line of Daniel Santos from Piper Sandler.

So my first one, just to kind of switch it up, is on ESG. Clearly, it's a bigger focus for investors, Board members. And there are some clear environmental benefits to shopping centers, for example, versus individual shipments. So I guess I wanted to give you guys an opportunity to maybe expand on how ESG fits into your overall strategy and maybe talk about ways that you're sort of communicating that to the broader community.

Sure. I mean there's no question that we would agree with you that there's a lot of room to run in our ability to get very focused in on this. I do think that physical real estate in terms of a distribution point for retail is much, much better for the environment than this idea that we're going to ship a box that contains a tube of toothpaste to Europe in an airplane, in a truck to people and et cetera.

So I think people are beginning to understand that, Dan. I think it's a topic of conversation, for sure. And I think we can really excel there. And we're only scratching the surface on what these physical properties -- what we can do there in terms of things -- the simple things such as wind and solar, but then there's water. There's just so many things going on. So it's just the beginning.

We've done a better job in the last, I'd say, 6 months of communicating what our goals are there by filing our inaugural GRESB and by putting our goals out to the investors as to what we want to accomplish. This -- everybody on the team is kind of involved in this. So I think it's early. We can have more for you later, but we're -- it's a big deal.

Dan, I would add. As an industry, I think we can do a better job in terms of working with ICSC to put some numbers around this. Because we're talking about how it's environmentally better for us to have bricks-and-mortar versus this online tsunami that we're seeing. So I think you'll be seeing over the course of the next 6 months or a year some real hard data, showing that what we're doing is -- our carbon footprint is way less than the online channels.

Got it. That is super helpful. And then, I guess, if you could comment, I appreciate your comments on the -- at top of the call about the change in the narrative and sort of renewed appreciation from retailers. Aside from maybe rent and space taken, is that sort of shift in attitude playing out in other areas of your leases, like maybe you're getting sort of more favorable terms in areas where you wouldn't have otherwise?

Yes. I think bottom line is that we're in a very balanced place right now. I'd say during -- obviously, during COVID, everything was turned upside down, and it was difficult to know what we could and couldn't do in terms of leases. But I think we're back to pre-COVID, and even better, in terms of our ability to negotiate and get what we need.

But we're partners. We're partners with our retailers. We want our retailers perform well. So this isn't a one-dimensional thing or it's not one-sided. And I think we have -- we do the best we can in that partnership. And -- but for certain, we believe that we're in an environment where we have a product that is greatly desired right now, and we're certainly going to do the best we can to maximize that.

And we're also working with tenants because, coming out of COVID, they are, of course, seeing pressure in terms of their deliveries, what they're reporting to The Street. So we're trying to be a good partner that if a tenant needs 2 stores in '22, how do we work best to get that done for them, whether it's start drawings, working cooperatively with them.

So John's right, it's a two-way street. We like our balance right now, but we're going to continue to remember that it's customer first, and we're going to do everything we can do to help them.

Yes. I mean I think -- just to add to that because it's a good topic. We're just seeing demand right now, and we're seeing it from also retailers that we haven't seen it from in the past. The open-air retail segment is getting a lot of attention from physical retailers and attention from retailers that didn't look at it before. So that's adding to our ability to kind of get -- to be in this position, in an enviable position that we have more users than we do space, right? And we're -- we obviously have a lot of space to lease right now in front of us, but that's why we're so positive about it. It's the absolute opposite of maybe what it would have been in the past. "Oh, my gosh, what are we going to do?" We're like, "Oh, my God, this is awesome." We're -- so that is helping quite a bit the fact that we have a lot of new people jumping into the space as well.

Your next question is from the line of Chris Lucas from Capital One Securities.

Heath, just on the balance sheet. Obviously, COVID has made a mess with sort of net debt-to-EBITDA numbers as it relates to sort of what your longer-term target goals are. When you think about stabilized portfolio EBITDA, where do you guys want to be? And if you look at the, I guess, the example that you put in the supplement, is there some sort of excess capacity that maybe you're getting able to create because of rents you're getting and the demand you're seeing?

Yes. Listen, Chris, just because of COVID, I don't think our long-term leverage goals have changed. And we said before COVID that we're somewhere between mid- to high 5s is where we're comfortable. Sometimes we float above it. Sometimes we float below it. I will tell you that based on our current dividend levels and our cash flow levels and the lease-up that we have in front of us, we're really looking at having that net debt -- that elevated net debt to EBITDA come down fairly swiftly. So we'll be back to those target levels before you know it.

So again, our philosophy hasn't changed. Again, the uptick in leverage is just simply an erosion of our EBITDA, and we're going to grow that back over time. So that's how we're looking at it.

Okay. And then, John or Tom, I guess just as it relates to the anchors, you laid out sort of how long it takes to get from sort of lease signature to commencement. I guess I'm just curious in sort of pre-pandemic world, the anchors had sort of narrow windows in which they were looking for space being delivered. Is there any change to how they're thinking about when they want the space? Is there any more sense of urgency from them in terms of getting those units open?

Chris, I would say the primary national retailers that we all know, they maintain their 2 basic windows. But what we're seeing in the grocery space, in the beauty space and quite a few others is that how do we get our stores open as quickly as possible. And that's what we're working with a lot of tenants on to help them reach that goal, just from a relationship standpoint. But with the big nationals, their windows have not changed. But we're seeing others below them try to be far more aggressive in terms of getting their store counts based upon what they have dictated to The Street.

Chris, this is John. Again, I do think the one thing that probably has changed there is their willingness to work on spaces that maybe they wouldn't have looked at before in terms of configurations. So we've been very successful in doing nonstandard configurations. There used to be such a focus on a particular width and depth. Now there's a lot less focus on that, more focus on the real estate like, "I love this real estate. I want to be there." We've got a couple of deals going right now that are very creative. And as I said, we're also bringing players into the space who weren't in the space before. So that helps that also.

I think, as Tom was saying, the delivery schedules, that has a lot more to do with how they get product and the timing of getting the product and obviously not wanting to open into the wrong season for that particular retailer. But we're also finding guys coming to us and going, "Can you squeeze us in? Can we -- we need another deal in early '22, right? Can you get us in?" So that -- there's a lot more flexibility there, Chris.

Great, John. And last question for me is just as it relates to the competitive change maybe for transactions in the warmer, cheaper markets. Are you seeing new capital sources come in to compete on transactions, either coming from out of the area that you haven't seen before or maybe people who have previously been focused on resi or industrial looking at retail now as an alternative investment for them?

Well, I can tell you we're certainly seeing more people, whether they were in it before or not in it, I mean, there's a lot of capital and frankly capital queuing up. And again, people are on to this idea of warmer, cheaper, Sunbelt, whatever you want to call it. And so it's -- the popularity is definitely bringing capital, and so -- and I think that's why we're seeing all of a sudden in the last, literally, I don't know, 6 weeks more product that is coming to the market.

But frankly, it's interesting. The more product, the tighter the cap rate seems to be. And people -- I think there's this -- as Heath alluded to, the common narrative that retail was bad is over. And now all of a sudden, open-air retail is good, right? And so that brings more people into the market, and maybe you've got people that manage money that now are happy to bring deals in that are open-air retail.

So I just think it's all good. I think the product is strong. We've known that before. The growth rates are good. And in KRG's case, we've got so much upside. I mean it's just -- we just got to go out and execute, Chris. That's what we do, and we're going to do it.

Next, we have the Wes Golladay from Baird.

You did mention the benefits of upgrading the tenant roster, and you said it many times that demand is good. So I'm just wondering if you plan on recapturing a lot more space this year.

Look, I think we've recaptured what we could, Wes. The rest would come just kind of more naturally through expirations, which is not a tremendous amount. So I think we've recaptured what we can recapture. There may be a couple of deals on the margin.

But that's why I said I feel like we're kind of getting close to bottoming out. I'm not positive that that's not another quarter away, but we're pretty close. And now we're focused on the runway, and we're going to run hard on that.

Got you. And then looking at the new lease volume, you averaged about 135,000 square feet in the last 2 quarters. I mean is that a good run rate? Or will it, I guess, bounce around because of the shop/anchor mix? And then maybe an add-on to that question would be the TIs ticked up a little bit higher, but was that due to mix shift as well between anchor and shop?

Yes. I mean the latter, yes. The second part of your question, yes. It's hard to predict those on a quarterly basis in terms of square footage. It's just -- like I said, we've got 16 deals or something come into our committee on Monday, I've only had a chance to briefly review, but it's a combination of shops and boxes and a couple of outparcel deals. So I don't think we can predict how that would be quarter-by-quarter, Wes. But overall, we have mostly anchor space to lease in front of us, even though we have some shop space. So there will be particular quarters where it's all anchors.

(Operator Instructions) Your next question comes from the line of Craig Schmidt from Bank of America.

As one of the strip REITs that have a pretty heavy exposure to the off-price retailers, I wonder if you could comment how they have been performing in '21. And if you've noticed how their in-stock positions at their stores have been.

In terms of performance, Craig, they've been performing very well, certainly in our portfolio. And to the extent that we get sales reports, we see them getting right back to where they were and better. So I mean TJ, Ross, Burlington, Rack, I mean, these guys are all doing strong business.

And by the way, the apparel trade is just coming together right now. When you think about where COVID has put people and now the fact that more people are getting out and about, apparel is looking pretty good for the next couple of quarters. So I think we've seen very strong performance.

In terms of merchandising, Tom, I don't know if you want to comment on that in terms of the stores themselves.

Yes. I would say when we jumped into COVID, the Rosses and other people obviously had some supply chain issues that they were dealing with. And there's times in which the stores' product levels were down, and so the battle was to get it in as quickly as possible. So everyone we're speaking to feels like that has been resolved, but the trajectory appears to be strong. I mean we talk to these people every day. They're bullish. They're looking for additional stores. And I think they feel like the post-COVID world plays well to their hand.

Do you stand in a favorable position given you have such a good exposure to these names for their expansion needs?

Sure. I mean, to the extent -- that's, again, I think, what we're talking about, Craig, is the fact that we've got this anchor portfolio, the original 27, now 23, spaces to lease. That's a lot of opportunity for us with the partners that we just mentioned, TJ, Ross, Burlington, et cetera, Nordstrom Rack. But beyond that, that's where we're seeing so much more demand in terms of the grocery segment, in terms of us cutting up a couple of these boxes and bringing in the retailers that formerly weren't open-air players.

I mean it's a litany of opportunities for us right now and frankly because our ABR on the boxes we got back was pretty darn low. That's why we're excited. I mean we just have all this lease-up scalability and upside, most importantly, cash flow growth, EBITDA growth. And when you get a 40% return on capital, that's a lot of cash flow. So yes, all good on that front.

Okay. And then along the line of retailers, what's your strategy with LA Fitness and Mattress Firm?

Well, as far as LA, I mean, they certainly appear to be a survivor in the space at this point in time. We've done -- as we've mentioned, we did a couple of fitness deals but not very many. On the smaller side, we're seeing Orangetheory come back pretty hard on the small side. But look, I think we're going to be careful with what we do in the space, but we are definitely seeing pickup there with them.

And in terms of Mattress Firm, we haven't really changed our thought process there. Once they came out of the bankruptcy, they were pretty heavy equity. We haven't heard much out of them, other than them paying rent, which is awesome.

And Craig, they're less than 1% of ABR. So we'll watch them, and we'll see how it goes.

And on fitness, there are some pretty exciting people out there with new concepts like UFC. So we'll be very careful as we measure our risk and exposure, but we still see that as an expanding market.

I am showing no further questions at this time. I would like to turn it back to Mr. John Kite for any further comments. Please go ahead, sir.

Well, again, thank you, everyone, for joining us, and we hope to actually physically see some of you soon. And we are very much looking forward to the next couple of quarters and very optimistic about what's in front of us. Thanks again.

And this concludes today's conference call. Thank you all for joining. You may now disconnect.