Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Kite Realty Group Trust Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions] I’d now like to hand the conference over to your host today, Mr. Bryan McCarthy, Senior Vice President, Marketing and Communications. Please go ahead.

Thank you, and good morning, everyone. Welcome to Kite Realty Group’s second quarter earnings call. Some of today’s comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company’s results, please see our SEC filings, including our most recent 10-Q. 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 will now turn the call over to John.

Thanks, Bryan, and good morning everyone. Thank you for joining us today. The KRG family appreciates this continues to be a challenging time for everyone, including our investors, tenants, customers and vendors. I hope this call finds you all doing well. With the global scientific community racing towards a variety of solutions to the COVID-19 pandemic, we’re feeling incrementally more optimistic as compared to our last earnings call. As always, our goal is to provide as much transparency and color as possible within the context of the information we have today. With that in mind, we’ll spend some of the time today discussing the short-term dislocation and our rent collection activities during the second quarter and for July. As for the long-term impacts of this pandemic, the unknowns, especially as it relates to the timing of a solution, still outweigh the knowns. But we are starting to see some encouraging green shoots and emerging trends that present potential long-term opportunities for our business. Prior to the past March, we could never imagine an environment where monthly rent collection rates would serve as a proxy for portfolio quality and management team determination. As of today, we’ve collected 80% of our second quarter gross rent, which grows to 82% when applying security deposits, an additional 9% of our second quarter gross rent have been contractually deferred. Therefore, we have 91% second quarter gross rent addressed, which speaks volumes on how retailers view the necessity of staying in our real estate. As for July, we’ve collected 87% of gross rent today, along with another 2% in deferral agreements. We’re pleased with our sector leading collection performance, as a look through to the portfolio transformation that took place last year, the tenacity of the KRG team, and the depth of our tenant relationships. With…

Thank you, John, and good morning, everyone. As was the case last quarter, KRG continues to maintain a strong balance sheet and our posture remains cautious with a focus on capital preservation. That being said, we are feeling incrementally more confident about the business as evidenced by our decision to reduce our outstanding line of credit balance to $100 million. As of June 30, our net debt to EBITDA was 7.1 times, elevated due to the impact of the COVID pandemic. Please note that we calculate NDE by annualizing our most recent quarter of EBITDA. Therefore, the disruption caused by COVID will immediately appear in our NDE metric. More importantly though, our liquidity position remains strong with no debt maturing until 2022, only $9.4 million committed to development projects and the Big Box Surge, with approximately $584 million of liquidity available to KRG. Our capital allocation discipline is evident in our latest redevelopment disclosure. As further detailed in the supplement, this past quarter, we entered into a joint venture to pursue a multifamily opportunity at Glendale Town Center. We are partnering with a local developer to build 267 apartment units on an unused parcel of land adjacent to the center. In exchange for the contribution of land, KRG secured a 12% interest in the venture. The best part about this redevelopment is that our future capital contribution is limited to site preparation costs. Given the recent dislocation, we think it’s important to provide clarity on the bad debt. After examining all of our outstanding balances, tenant by tenant, we are reserving $6.6 million of accounts receivable for the second quarter. Of that total number, $4.9 million is related to the second quarter billings that we are estimating are unlikely to be collected. $870,000 is related to balances that were outstanding at the end of the first quarter that we now deem uncollectible. The remaining $880,000 is related to non-cash straight-line rent reserves that have already been recognized in income, but most likely will not be collected through contractual rent bumps going forward. This is all detailed on Page 17 of our supplemental. As a reminder, primarily due to COVID, we took a $3.6 million bad debt charge in the first quarter. We are far from out of this crisis. And we remain very guarded with our capital. While we are actively looking for opportunities that may come out of this distress, we would be hard pressed to pursue anything that will be detrimental to our strong capital and liquidity positions. Thank you to everyone for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

[Operator Instructions] Our first question comes from Alexander Goldfarb with Piper Sandler. Your line is now open

Good morning. So first, the PowerPoint that you guys put out has a lot of good stuff. So thank you for whoever spent time on that or weekends. Appreciate it.

Absolutely. You can thank Jason mostly for that.

Okay. Jason, thank you. And then the other thing that just continues to be impressive is the fact that your movie theaters last quarter and this quarter, even though they’re all closed, they’re still – like a good amount are paying rent, which is just really impressive. But let me get to my questions. First, just a big picture. You guys had great rent collections. You have good – great balance sheet, limited CapEx needs. You felt comfortable reducing your line of credit balance. Where do you stand on the dividend? And where do you think your taxable income will be this year relative to your need to restore the dividend this year?

Sure. Well, I think kind of like last quarter in our conversation, Alex, I mean, we’re going to continue to see how the quarter plays out. So we will continue to see how the next two months evolve before we make a decision on the third quarter. That said, as we mentioned, we were incrementally more positive this quarter and we’ve been doing quite well with our initiatives. So we feel good about that. But we still – as we also pointed out, we still can’t really predict where this goes in the balance of this year. So we’ll continue to maintain a conservative stance. That said, we are working through our taxable income projections. And that remains a key element of what we will ultimately do. So too early to obviously say what it will be right this minute. But when we discuss with the Board in an upcoming board meeting, we’ll be talking about all the things that we just laid out, which is our view of the health of our retailers, the cash flow, et cetera. I think we feel good that the decision we made last – in the last quarter as related to paying a small amount relative to our projected, kind of a portion of our projected taxable income, that’s going to adjust somewhat when we look at the next two – at this quarter and next quarter.

Okay. And then as far as the second wave, the COVID outbreaks that especially came across a number of your Sun Belt markets during the quarter and subsequent, did you guys see any impact? Was there any – like did tenants slow down leasing discussions? Were sales impacted? Were your centers impacted? Or as these waves swept through some of your markets in Florida, Texas, et cetera, the – your portfolio really didn’t notice a difference?

Well, I can’t comment on waves because I’m not quite certain that I would suggest that it’s a wave versus just an extension of what was already there. But initially, there was a lot of focus and, particularly, media focus on Texas and Florida, maybe three weeks ago. But quite frankly, the massive strain on the hospital systems that was projected didn’t materialize really from our view in a way that really, really changed people’s daily lives. So I think as it relates to, particularly Florida and Texas, which is where we were potentially most impacted, we really did not see that. And as people have become more accustomed to going out about their daily routines, I think, frankly, in our particular locations, people have taken fairly robustly to wearing masks and feeling a little more comfortable in going out, doing their daily thing. And so we benefited from that. So we really did not see significant pullback in any way. Certainly, discussions about, boy, could that happen, but look, it’s early yet on that. That’s why I don’t want to suggest that there – this was a wave that has now gone down. The reality is this will continue to be with us for quite a while. And we are thinking that our – the strength of our real estate really came to fruition here. And the things that we did last year with Project Focus, that’s why we’re doing well. I mean, ultimately, the strength of our real estate has been way misunderstood, and it’s why we’re doing well in addition to the fact that we have a great group of people with great relationships that are intensely pursuing collection quite candidly.

Thank you, John.

Our next question comes from Christy McElroy with Citi. Your line is now open.

Hey guys. I’ll echo Alex’s comment. Thanks for the status breakout of the Q2 billed rents and collections in the presentation. It’s helpful. I’m wondering if you could provide that same info for July. I think, John, you said in your comments that on top of the 87%, that you’ve deferred another 2%. Is that right? And then so obviously, collections have improved. But can you provide some more color on sort of the status of the unresolved buckets in terms of what’s still in pursuit versus what’s really unlikely to be collected? And color on your strategy for dealing with that unresolved bucket as it stands today.

Sure. I think we can all chip in on that. I think as it relates to the strategy around it, the strategy is exactly the same, Christy, as it’s been since really early March when we started to focus in heavily on this and created our SWAT team that meets every day. So it’s a bottoms-up strategy, really. And it continues to be a bucketed strategy where we have different approaches with the small mom-and-pop tenants and the – versus the large nationals. And also as it relates to that, we’ve done great in terms of – the great majority of the large nationals have been very good to work with, and we haven’t really gotten ourselves into very difficult situations there except maybe a couple of cases. As it relates to – we can’t get that granular on July yet kind of per category. But suffice to say, we think we’re tracking to do better than we did in the quarter. And I don’t know, Heath, if you want to give detail around those other buckets or not, but I think it’s a little early to give too much detail there, Christy, just because we’re still actively working on that.

We’re still making progress in terms of negotiations with a variety of tenants. I will say the encouraging fact is that right now, between tenants that are complying with their lease and ones that we have affirmed deferral deals with, it’s over 90%. So we’re really chipping away at these last sort of holdouts that are not coming to the table yet with a reasonable landlord and tenant friendly scenario. So again, it’s – like John said, it’s dynamic. We’re going to keep pushing at it. And our July number, I’m going to guess, is going to keep getting bigger because, as we all know, we can keep collecting rents in periods after the month is over, and we’ll keep doing it.

Yes. I think we’re confident that what’s billed and unpaid, Christy, we are still going to pursue, and the majority of that will be paid. So I think that’s our macro view there.

Okay. Thank you. And then as you think about your liquidity and your capital position today and the use of that capital, how do you think about taking advantage of any private market dislocation, if there is any, to buy assets, given that you don’t really have any anything committed in the value creation pipeline. Debt maturities look okay. What gets you comfortable with putting capital to work in acquisitions potentially?

Yes. I think it’s a great question. And it’s what we were trying to get to with our comments in that usually in times of great chaos, there’s opportunity there. And frankly, this time around, versus 2008, 2009, I think we’re really well-positioned to try to take advantage of that. I do think it’s a little early still. And I know people keep saying that. So when is it not too early, but, it’s a little early. That – just really early in the sense of the opportunities haven’t really presented themselves that would be real estate that we would want to own at a dislocated price. The couple of transactions that we’ve seen, frankly, have gone off at very low cap rates. And I think people have been talking about cap rates. My personal opinion, I believe that cap rates, if anything, come down due to the fact that you’ve got reduced NOI and more upside. And you’ve got the 10-year at 50 basis points, who knows, I mean we’re not predicting interest rates. But that’s a long way of me saying, we’re actively, like, positioning ourselves to be there, but haven’t seen it yet, Christy. And who knows what happens with legislation around. You’ve got this new legislation proposed in CMBS land, et cetera. So we’re hanging around the rim, is a better way for me to say it.

Thank you.

Our next question comes from Todd Thomas with KeyBanc. Your line is now open.

Hi, guys. This is Ravi Vaidya on the line for Todd Thomas. Hope you guys are doing well. Just wanted to ask a few questions about the rent collection data. Can you comment on how they trended between national versus local tenants for the second quarter?

Sure. So our local tenants, this is truly the mom and pops, they were 76% collections for the second quarter and 79% collections for July. So actually very, very, very strong for the mom and pops. And then the nationals were probably 3% to 4% higher for each of those periods. So call it 82% and 84% for the nationals.

Well, great. And just about the restaurants. I noticed that the rent collections for the quick service and the full sit downs are very similar. And we’ve seen a larger delta between these two types across the subsector. Can you offer any additional color?

I think the reason why you’re seeing those – these sort of similar is in the full service restaurants, we don’t have a lot of the, call it, white tablecloth fine dining, which I think has been the hardest hit. So we’ve seen our full-service folks really being creative in terms of takeout, having curbside pickup, et cetera. So the folks that we do have, it’s not that very, very high fine dining where they’re seeing their numbers really decline. So I think that’s the reason why those numbers are fairly similar.

Okay. And just one more, on the soft goods collection. I noticed that they’re 99% open in August. 2Q collections are a little – are significantly less than that. Can you offer any color for that? Is that why – is that because they opened up later within the quarter?

I mean each tenant has its own individual set of circumstances. I wouldn’t paint a brush there. The reality is, we’re – in the very beginning of the pandemic, those guys were kind of disproportionately impacted. As we’ve begun to open up everybody, they’re doing better. So we don’t foresee that not catching up over time generally with our overall collections.

Okay. So you expect that to grow in July and in the future?

Yes. We expect to grow. I mean I don’t know exactly when, but we expect it to grow. And the point I was making earlier is, if we’ve already addressed 90% of our rent, right, in July, we’re doing pretty damn well. So we’re going to improve things on the margins, and that would be something that would be on the margins to improve.

Okay, great. Thanks for answering my question.

[Operator Instructions] Our next question comes from Craig Schmidt with Bank of America. Your line is now open.

Thank you. I was wondering what your expectation is for occupancy by year-end versus the end of 2Q 2020? And that would be for small shops as well as total.

Well, I mean at this point, Craig, we’re not going to give a number on a projection like that, but – because we just don’t know. So I think, look, we – we’re trying to make the point that our real estate is a lot better than I think some people have perceived it. So we’ll see what that means as it relates to occupancy. The one thing that we’ll never do is we will never try to preserve occupancy in a panicky way. In other words, we won’t do deals that are deals that we think are destructive to long-term value, which is why if you look at the quarter, it’s why – we’re pretty proud of the way we performed in our leasing spreads and our leasing volume. And that’s why I pointed out the non-option renewals because what that – the reason that’s important is these tenants didn’t have an option. So it was a free negotiation, in other words, and we got a 12% spread. So I think we’re more focused as a team on that than we are whether our occupancy is up or down 100 or 200 basis points.

Okay. And then just I’m wondering about the consumer traffic at your Las Vegas properties. How are they doing?

I mean, we’ve done well in Las Vegas. They obviously took a real early hit. They’re doing the best they can, I think, in the market to try to bring people back. But bottom line is, it’s performed in line with the balance of our properties throughout the country. And again, I think people kind of think about this in the wrong way, as they’re thinking about the market when you really need to be thinking about the individual real estate within the market and the tenants that occupy those spaces. So when you look at our community shopping centers that are – a great majority of which have the grocery component, the average size of our center is 140,000 square feet. In this BOPIS world that we talked about, we own the right real estate, and that’s what I want the message to be, is we own the right real estate. We’re outperforming right now. But who knows where this all goes. But the things that we did last year set us up, and we love the market. Vegas, long run, is a great market. But most important for people, I think, to think about is actually the individual micro, looking at the micro situation instead of the macro like that.

Okay. Thank you.

Thanks.

Our next question comes from Floris van Dijkum with Compass Point. Your line is now open.

Thanks. Good morning, guys or afternoon, I guess, depending on where you are. Can you maybe comment on August trends? And how much more of an improvement can you get from here?

Floris, in terms of August, I mean, we can’t give a lot of detail. Obviously, it’s the first week. But so far, we’re on track as to where we’ve been. So we have a – look, let’s put it this way. We set goals on every one of these months, and these goals continue to push up. And that’s our goal, is to continue to push up. So I think trend-wise, as long as we continue in this path that we’re on in the multiple markets that we are in, as it relates to being open and tenants being open for business, that’s the most important thing. Everything else is kind of a side show. So we feel good about that, but it’s kind of too early to say greater detail.

Thanks, John. And maybe some of your peers have been talking about the benefits of being well capitalized during this pandemic in that they’re starting to see that play a bigger part with their discussions with tenants as well. Maybe if you can comment on the position of Kite in your markets right now and relative to some of the – your competitors, if you will? And also maybe touch upon the perception of Kite in the overall REIT market as well, as you see that changing going forward?

So kind of three things there. I’ll talk a little bit about the importance of the company, the strength of the company and maybe have Tom talk a little bit about how that parlays into our individual discussions with the retailers. But in terms of the overall, I think, for sure, the fact that the retailer knows they’re dealing with a strong company, a company that is going to survive and thrive, it is a factor in how they make decisions relative to the real estate itself. But as I said in the beginning, the real estate itself is a very important element, but you do need that second piece of it, which is to say, here’s a REIT that has whatever, approximately $600 million of liquidity and has plenty of capacity to help us and has capacity to be there to invest with us in the future. So Tom, you want to talk about the retailers themselves?

Yes. From a retailer perspective, on an individual basis, one of the things we’ve really tried to do is we’ve tried to take a long perspective, this isn’t a sprint, it’s a marathon. So we’re really dealing with our customers on a long perspective, a long view, knowing what’s best for the real estate from a long-term perspective. So we believe we’ve actually enhanced relationships through this time period of working with them. The communication channels have been even higher. So we like to believe that we are putting ourselves in actually better positions with each and every one of these tenants as we move forward. But there’s no doubt, relationships and trust will play a huge part in this moving forward.

And then kind of relative to your question about our position versus the peers. Look, I think all I can say there is, the message we’re trying to get out there is that our real estate is quite – what’s the word, is performing really well. We don’t think the public markets have quite appreciated the strength of our real estate, all the things we did last year that significantly improved the portfolio. As it relates to the peer group, I think, look, there’s lots of great companies that have a lot of great things going on. But the reality is, when we look at the stock price and the discounts and, I think, the Page 12 of the presentation that kind of ran you through how draconian the valuation is relative to what we’re experiencing in our collections and our – the strength of our real estate, that’s the point we’re trying to make. Even if you look at us versus, say, like The Net Lease Group who – we’re collecting rent at – basically at the same velocity that Net Lease Group does, and they trade at 6, 7x multiple to us. So long story short, all we’re going to keep doing, Floris, is grinding and getting this done. And show – and improving and pushing and working with our partners, the retailers. So we feel really good about that. We cannot control these other things, and we certainly can’t control the evolution of the pandemic. But everything we’re seeing as it relates to that, we feel better about. And we feel very strongly in this company. And we just want the investment community to kind of start looking at that and realizing, “I missed this”. There’s a great opportunity here in KRG.

Thanks. I appreciate that.

Thank you, Floris.

Our next question comes from Chris Lucas with Capital One Securities. Your line is now open.

Good afternoon, everybody. John, just kind of following up on that. I appreciate the comments and certainly trying to figure out sort of what maybe leads to your relative outperformance on rent collection. Is that sort of identifying anything that’s obvious as it relates to sort of say, tenant line of business exposure or anything along those lines? But I am wondering whether or not you feel like the fact that your portfolio is relatively modest in size compared to some of your public peers, that the conversations that the tenants that you’re trying to collect rent from are being had at the C-level rather than at some more regional level. Do you think that has an impact in terms of your ability to collect?

I mean, I totally get the question. I think size, it’s an interesting thought because you could look at it two ways. One, our size, which we believe is kind of big enough to be important to the right retailers, maybe not so huge that we aren’t personally involved in everything as it relates to Tom and myself and Gregg Poetz, our Head of Leasing and Heath and lots of people. I mean we have a group of people that get together every day and talk about how we’re going to push the needle up, right, and keep pushing. So I don’t think that it really is that in the end, though. I think it’s the real estate and the people that – the relationships that we have over the last 30-plus years, Chris, that whether or not you own 500 centers or 100 centers, I don’t know that, that really matters. What matters is where they’re located. And as Tom said, how are we going about it? And are we actively going after this in a way that we’re right in front of these people all the time. Certainly, the C-suite of these retailers has got a lot to deal with. And we’re empathetic to that. But by the same token, so do we. And I think that’s where you get to the – that’s how you get to this compromise, and I think it’s why we’ve done what we’ve done.

Okay. Thanks for that. And then a detailed question, Heath, on the – I guess, can you give us a sense as to the exposure of – ABR exposure of tenants that have filed bankruptcy in 2Q that you guys have?

Yes, sure. So for the tenants that filed bankruptcy in Q2, our total ABR exposure is 2.5%.

Okay. That’s great. Thank you. That’s all I had today.

All right, Chris. Take care.

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mr. Kite for closing remarks.

Okay. Well, thanks, everyone, for joining us today. We appreciate it. And we hope everyone stays safe and healthy, and we will talk to you soon. Goodbye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.