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Kite Realty Group Trust
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Good day and thank you for standing by. Welcome to the Q1 2021 Kite Realty Group Trust earnings conference call. At this time, all participant lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]
I would now like to hand 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 will now turn the call over to John.
Thanks Bryan and good morning everybody. Thanks for joining us today. Spring's here and we are 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 is 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 are 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 sign not opened NOI is approximately $10 million, which will come online in late 2021 and early 2022. 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 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 have got great expectations for Eastgate Crossing and all of our assets in Raleigh.
Speaking of Raleigh, as I am sure you have 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 feet 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 are even seeing this play out in the reallocation of congressional representatives with those same three states adding seats. With the announcement of the Weingarten and Kimco merger, KRG is now the most compelling way to directly invest in sun-belt 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 are proud that our strategy is paying dividends and we continue to prudently look to expand our exposures 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 lease rates, we believe we are at or near the low watermark. On the anchor front, we have already executed four leases and are negotiating multiple leases on the remaining 23 vacant boxes. Anchor acceleration is off to a very strong start. You can see economic opportunity on page 21 of our investor presentation.
As we discussed last quarter, assuming the current ABR for our in-place anchors, there is a potential mark-to-market of nearly 20%. To increase transparency, we have added page 22 in the investor presentation, in the sup so you can track our progress as we lease up boxes. The four 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 will say again, we are 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 has 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 could mean to KRG's forward NOI, we have provided new detail in our investor presentation. As shown on page four, 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 the guaranteed outcome or providing any sort of forward guidance. We are 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 ad I cannot wait to see what the future holds for us.
Now I will 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 am 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 death 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 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 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 have now deemed to be uncollectible. There are other several global items on page 17 of the supplemental that demonstrate our improving fundamentals on a sequential basis.
Total bad debt for this quarter was $1.6 million as compared to $2.6 million for the fourth quarter of 2020. Our first quarter recurring revenue has picked up compared to fourth quarter of 2020. As to accounts receivable, we collected $5.8 million that was outstanding at year-end, including deferred rents. Today, total outstanding deferred rent stands 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 up 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 remains solid. Our net debt to EBITDA, pro forma for the ground lease dispositions, was 6.6 times, down from 6.8 times 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 prices of notes to $30.26. The proceeds of this transaction will remain in 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 strong 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 of 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. Your line is open.
Good morning guys. Thanks for taking my question. I wanted to maybe talk or have you describe a bit more the opportunity at Parkside Town Commons. Is their expansion possibility? Does that center need refreshing? Does that have outparcel opportunities to take advantage of the additional demands? Or what kind of impact do you think that could have on rent there and on tenant demand?
Hi Floris. So 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 will let Tom handle that in a second. But in terms of the overall macro there, I mean it's really an opportunity for us to highlight what's going on in that market and the growth that it's experienced since we been down there. And frankly, we own, I don't know, just under a 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 a vision of the Park going to continue to expand to the South. So a little few numbers for you to think about. The largest park of the country. It's got 300 companies, 55,000 employees over 7,000 acres. So it gives you 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 of 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 coming is incredible. This mixed use project, we have got close to 300 apartments. We have got great tenants with Target, Harris Teeter, et cetera. But we do have expansion possibility that would be on the reuse. So we are 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 then Floris, this is Heath. I will also mention, it's not only just about Apple having their location there. It's also about their vendors. So we think there is going to be huge uptick in office demand and also hotel demand man. Because again, once Apple arrives, their vendors will follow. So it's going to be a multiyear tailwind for that area.
All right. Thanks. Maybe one other question, if I may. You guys are talking a little about the upside potential in NOI here, which seems pretty strong. How do you guys feel about what has happened? And maybe, John, if you could comment on the Weingarten transaction? And 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 though 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 are 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 fives. I think we have seen that. So I think it's an excellent opportunity for everyone to kind of check what they are 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 are at below 91% overall, that's a lot for a company that's been 955, 96% for a long time pre-COVID. And when you look at the rents that we have in our portfolio and really I am just telling you what you can find on page four of our investor presentation, there is 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 and I understand the thought process there. So, all in all, it's all positive for us.
Thanks John.
Thank you.
Your next question comes from the line of Katy McConnell from Citi. Your line is open.
Thanks. Good morning everyone.
Good morning.
Can you provide 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 re-leasing process?
Yes. Sure. Basically in the additional anchor space we got back was kind of a combination of a couple expirations and then frankly are 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 struggling a little bit. And we want to you 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 this a little bit, if he would like to. But my view on it is, you were pretty close to the bottom of that, Katy. It's pretty close to that this quarter and next quarter. But really, we are much more focused on the fact that we have 10 more deals that we think we can do in the near term, maybe eight, I don't know.
But we have got a lot going on in the hopper in terms of negotiating leases and LOIs. And there is just a ton of volume. There is a lot of really interesting things going on. And it really just circles back to the fact that there just is no, there is very limited inventory of this high quality, open-air retail and a lot of tenants are focused on open-air, high quality retail. And just nothing's been built for 10 years. So when you own stuff like we do, you get a lot of phone calls.
Tom, you want to add to that?
Yes. I mean I think one example of this is the two leases that we signed here just recently with ALDI and Total Wine. These both replace former Stein Mart's completely unproductive, we will say there is somewhere between $5 million and $6 million of sales and we are 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 are looking at it as a net positive. And so far we have been very successful of replacing them with much higher tenants that drive greater traffic to the projects.
Okay. Thanks. And then you have seen pretty favorable trends in sun-belt market throughout the pandemic. So I m curious if you can just comment generally on overall transaction market trends and if you are seeing any compression in cap rate synergy as a result?
Yes. I mean, no question that the markets that we are in are pretty hot. And it's something we have known for a while. And I think now we are 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 five 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 fives, maybe a very low six depending on the deal. But you just can't find them.
And look there is more product coming on the market. But that's where the cap rates are. And it makes sense because the unleveraged IRRs that you can produce buying assets in that range are still very good unleveraged IRRs in today's world, especially when you look at the durability of the cash flows, right. And we have proven that, I think, better than anyone. 97% rent collection is obviously almost back to hat exactly where we were pre-pandemic. We are very close to that now.
And that is a direct correlation of the quality of our real estate, as we said and the quality of our people and the way that we go about our processes. But these assets are definitely sought after.
Okay. Thanks everyone.
Thank you.
Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open.
Hi. Thanks. Good morning. 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 on the last call, we are very active in and 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 that might be available or would like them to become available. So we are very focused on that. We are not in an 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 have identified in terms of our lease-up program.
So the answer is yes. We are actively engaged in always looking at opportunities. I think we are very selective in that because of the way we have 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 are in the position to take advantage of it, not everybody else is. So that's a nice place to be. But we will take that on a case-by-case basis, Todd. But certainly, there is more today than there was six months ago.
And Todd, this is Heath. I also just want to mention that obviously as we are looking at acquisitions, we are also keeping an eye on our leverage. And so its' not our plan to obviously undo all the hard work we did in 2019, in getting iron on our balance sheet. So yes, we will look at opportunities but we will be responsible about it.
Okay. More generally, do you think that, we have seen a couple of larger public to public transactions here, but thinking about the environment stepping back, do you think that there could be some smaller portfolio, some larger scale transactions coming to marketing and getting done on the retail space? Do you expect that type of activity to continue relative to what we have seen in the prior years?
Yes. Todd, I think assuming the world stays on the trajectory it's on, I would think that there is going to be other things happening. And as I just said in the previous question, there is just very limited supply of this type of product that we own and a few others own. So I do think when there is opportunity to get scale with that that makes sense as long as Heath said that you are doing that with the iron in your balance sheet. And look, we have 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 is an opportunity for people to start thinking that way. And I do think people are thinking that way. But you know, time will tell.
Okay. And just one last question on the decrease in the portfolio lease rate and occupancy a little bit. It sounds like you know 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 are discussing and that you have 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 sensing today?
No. I think we have 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. And 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 these 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 is just a tremendous amount of interest, particularly again in the markets that we are in. We are not the only ones that realize the strength of these markets obviously. But when you look at, as I said, the $10 million 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 2022. So that kind of tracks this timeline that we have been talking about.
All right. Thank you.
Thanks.
We had your next question coming from the line of Daniel Santos from Piper Sandler. Your line is open.
Hi. Good morning. Thanks for taking my questions. 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 individuals shipments. So I guess I wanted to give you guys an opportunity to maybe expand on how does ESG fits into your overall strategy and maybe talk about ways that you are sort of communicating that to the broader community.
Sure. I mean there's no question that we would agree with you that there is a lot of room to run and 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 are going to ship a box that contains a tube of toothpaste to Europe in an airplane, in a truck and people and et cetera.
So I think people are beginning to understand that now. I think it's a topic of conversation for sure. And I think we can really excel there. And we are 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 is water. There's just so many things going on.
So it's just the beginning. We have done a better job in the last, I would say, six 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. Everybody on the team is kind of involved in this. So I think it's early. We can have more for you later, but it's a big deal.
And Dan, I would add. As an industry, I think we could do a better job in terms of working with ICSC to put some numbers around this because, yes, we are talking about how it's environmentally better for us to have bricks-and-mortar versus this online tsunami that we are seeing. So I think you will be seeing over the course of the next six months or a year, some real hard data showing that what we are doing. 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 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 are getting sort of more favorable terms in areas where you wouldn't have otherwise?
Yes. I think bottomline is that we are in a very balanced place right now. I would say 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 are back to pre-COVID and even better in terms of our ability to negotiate and get what we need. But we are partners. We are partners with our retailers. We want the retailers to perform well. So this isn't a one dimensional thing or it's not one-sided. And I think we do the best we can in that partnership. But for certain, we believe that we are in an environment where we have a product that is greatly desired right now and we are certainly going to do the best we can to maximize that.
And we are also working with tenants because coming out of COVID, they are of course seeing pressure in terms of their deliveries, what they are reporting to the street. So we are trying to be a good partner that if a tenant needs two stores in 2022, how do we work best to get that done for them, whether it's start drawing, working cooperatively with them. So John's right, it's a two-way street. We like our balance right now. But we are going to continue to remember that it's customer first and we are 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 that we are just seeing demand right now and we are 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 to be in this position, an enviable position that we have more users than we do space, right. And we obviously have a lot of space to lease right now in front of us. But that's why we are so positive about it. It's the absolute opposite of maybe what would have been in the past, oh my gosh, what are we going to do? We are like, oh my God, this is awesome, right. So that is helping quite a bit the fact that we have a lot of new people jumping into the space as well.
Great. Thanks. Have a great weekend.
Thanks.
Thank you. Your next question is from the line of Chris Lucas from Capital One Securities. Your line is open.
Good morning guys. Thanks for taking my questions. Heath, just on the balance sheet, obviously COVID has made a mess with sort of a net debt to EBITDA numbers as it relates to what your longer term target goals are? When you think about stabilized portfolio EBITDA, where you guys want to be and if you look at, I guess the example that you put in the supplement, is there some sort of excess capacity that maybe you are getting able to create because of rents you are getting and the demand you are seeing?
Yes. Listen, Chris, just because of COVID, I don't think our long term leverage goals have changed. We said before COVID that we are somewhere between the mid to high fives is where we are 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 are really looking at having that elevated net debt-to-EBITDA come down fairly swiftly. So we will be back to those target levels before you know it. So again, our philosophy hasn't changed. Again, the uptick in leverage is simply an erosion of our EBITDA. And we are going to grow that back over time. So that's how we are 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 we get from sort of lease signature to commencement. I guess, I am just curious that 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 are thinking about when they want the spaces? Or any more sense of urgency from them in terms of getting those units opened?
Chris, I would say the primary national retailers that we all know, they maintain their two basic windows. But what we are seeing on the grocery space, in the beauty space and quite a few others is, how do we get our stores open as quickly as possible. And that's what we are 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 has not changed. But we are 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.
Hi 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 have been very successful in doing non-standard configurations. There used to be such a focus on a particular width and depth. Now there is a lot less focus on that, more focus on the real estate, like I love this real estate, I want to be there. We have got a couple of deals going right now that are very creative.
And as I said, we are also bringing players into the space who weren't in this 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 new product and the timing of getting the product and obviously not wanting to open into the wrong season for that particular retailer. But we are also finding guys coming to us and going, can you squeeze us in? We need another deal in early 2022, right, can you get us in? So there is a lot more flexibility there, Chris.
Great. John, thank you for that. 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 into 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?
I can tell you we are certainly seeing more people, whether they were in it before not in it. I mean there is a lot of capital and frankly capital queuing up. And again, people are on to this idea of warmer, cheaper sun-belt whatever you want to call it. And so the popularity is definitely bringing capital. And I think that's why we are seeing all the sudden in the last, literally, I don't know six 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, as Heath alluded to, the common narrative that retail was bad is over and now all the sudden open-air retail is good, right. And so that brings more people into the market and maybe you have got people that managed 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 have known that before, the growth rates are good. And in KRG's case, we have got so much upside. I mean we just got to go out and execute, Chris. That's what we do and we are going to do it.
Thanks, John. That's all I have this morning.
Thank you buddy.
Next we have Wes Golladay from Baird. Your line is open.
Hi guys. Good morning guys. You did mention the benefits of upgrading the tenant roster and you said it many times that demand is good. So I am just wondering if you plan on recapturing a lot more space this year?
Look, I think we have recaptured what we could, Wes. The rest would come, just kind of more naturally through expirations, which is not tremendous amount. So I think we have recaptured what we can recapture. There may be couple of deals on the margin. But that's why I said I feel like we are kind of getting close to bottoming out. I am not positive that that's not another quarter away, but we are pretty close. And now we are focused on the runway and we are going to run hard on that.
Got you. And then looking at the new lease volumes, they averaged about 135,000 square feet the last two quarters. I mean is that a good run rate? Or will that, I guess, bounce around because of the shop, anchor mix? And then maybe add on to that question would be, the TI's 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 got 16 deals or something come into our committee on Monday. I have only had a chance to briefly review. But it's a combination of shops and boxes and couple 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.
Got it. I appreciate you taking the question, guys.
Thank you.
[Operator Instructions]. Your next question comes from the line of Craig Smith from Bank of America. Your line is open.
Thank you. As one of the strip REITs that have a pretty heavy exposure to the off-price retailers, I wonder if you could comment how you have been performing in 2021? And if you have noticed, how their in-stock positions at their stores have been?
In terms of performance, Craig, they have 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 park 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 have 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 are dealing with and there's times in which the store's product levels were down. And so the battle was to get it in as quickly as possible. So everyone we are speaking to feels like that has been resolved. But the trajectory appears to be strong. I mean we talk at these people every day. They are bullish. They are looking for additional stores. And I think that it 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 I think what we are talking about, Craig, is the fact that we have 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 are 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 box as we got back was pretty darn low, that's why we are 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 retails, 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 have done, as we mentioned, we did a couple fitness deals, but not very many. On the smaller side, we are seeing Orangetheory come back pretty hard on the small side. But look, I think we are 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 are less than 1% ABR. So we will watch them and we will see how it goes.
And on fitness, there are some pretty exciting people out there with new concepts like UFC. And so we will be very careful as we measure our risk and exposure. But we still see that as an expanding market.
Okay. Thanks a lot for taking the call.
Thank you.
I am showing no further questions at this time. I would like to turn this 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.