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Kite Realty Group Trust (KRG -0.61%)
Q2 2022 Earnings Call
Aug 03, 2022, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2022 Kite Realty Group Trust earnings conference call. [Operator instructions] I would now like to turn the call over to your host, Bryan McCarthy, you may begin.

Bryan McCarthy -- Senior Vice President, Corporate Marketing and Communications

Thank you, and good afternoon, 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 Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for a 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 David Buell; and Senior Vice President, Capital Markets and Investor Relations Tyler Henshaw.

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I will now turn the call over to John.

John Kite -- Chairman and Chief Executive Officer

All right. Thanks very much, Bryan, and good morning to everyone. I'm very pleased to announce that KRG has once again achieved outstanding quarterly results. Despite the volatile macro landscape, we refused to get distracted and are attacking the opportunities in front of us with a continued sense of urgency.

In fact, one of our core values at KRG is urgency, and we will leverage this mindset to take full advantage of the strong demand for our high-quality real estate. As reported yesterday, KRG generated FFO per share of $0.49, beating consensus estimates by $0.06 and representing a 44% increase per share over the comparable period last year. As set forth on Page 5 of our investor presentation, this massive year-over-year accretion is accompanied by meaningful improvements across every metric that historically correlates to earnings multiples. Our same-property NOI growth for the quarter was 3.8% and 4.9% year to date.

Heath will discuss guidance and provide more details around the components of each metric. But suffice to say, we're outperforming both internal and external expectations across the board. The primary driver of KRG's results has been the outstanding leasing demand we're seeing across our portfolio. We signed 206 leases representing nearly 1.2 million square feet this quarter.

The strong leasing volume was bolstered by superior blended cash spreads for comparable new and renewal leases of 13.2%. Excluding option renewals, blended cash spreads for comparable new and non-option renewals were 18.7%. For the first half of the year, we leased approximately 2.3 million square feet at a blended cash spread for comparable new and renewal leases of 14.5%. Our retention ratio for the quarter and year to date remains elevated at 90%.

The leasing environment for the KRG portfolio remains extremely constructive. COVID has forced many retailers to reimagine the use of their physical footprint to best serve the consumer. Five years ago, self-checkout, BOPUS and curbside pickup did not exist in the same capacity as it does today. The structural shift in how open-air retail is utilized by retailers and consumers has resulted in an 18-month period of record low retail bankruptcies, record high leasing volumes and brick-and-mortar sales growth outpacing the growth in e-commerce.

During our continuous discussions with retailers, they are making long-term real estate decisions to secure the best physical locations to serve their customer. One of our major focuses for the balance of 2022 is delivering our $41 million signed-not-open pipeline which is sector-leading on a percentage of NOI basis. As a reminder, our signed-not-open pipeline is contractually obligated rent that is scheduled to come online as outlined on Page 9 of our investor presentation. Thus far in 2022, tenants have commenced rent ahead of our internal budget, which is a testament to the intensity and dedication of the KRG platform.

In a period where supply chain issues remain prevalent, we're thrilled with our construction and tenant coordination team's ability to deliver spaces on time, coupled with the urgency retailers are showing to open the source. Our team is acutely equipped to handle such challenges from a position of strength, considering the breadth of experience we have in the construction industry. Our signed-not-open pipeline bodes extremely well for our growth trajectory going into 2023 as the rents from those leases will be fully realized. As a reminder, the $41 million of signed-not-open NOI is only a portion of the near-term growth opportunity as shown on Page 8 of our investor presentation.

Leasing our active developments and the balance of our portfolio to pre-pandemic levels would equate to an additional $25 million of NOI coming online over the next few years. Looking out across our sector, the remaining near-term leasing upside embedded in our portfolio is quite compelling. While our near-term capital outlay is primarily dedicated to leasing, we continue to allocate and raise capital in a measured approach to improve our portfolio. During the second quarter, we sold Plaza del Lago in Chicago for approximately $59 million at a cap rate that is extremely accretive relative to the assets that we've acquired in 2022.

The blended cap rate on our acquisitions this year sits at 5.75%, with unlevered IRRs expected to be in excess of 8%. In addition to our previously announced acquisitions in Dallas and Las Vegas, we acquired Palms Plaza, a 68,000-square-foot neighborhood center for $35.8 million. Palms Plaza is an infill location in Boca Raton, Florida, anchored by highly productive specialty grocer, generating approximately $1,300 per square foot in sales. Year to date, we've completed $102 million of acquisitions in our target markets and $66 million in dispositions.

On the development front, we stabilized two projects this quarter, shops at Quarterfield and One Loudoun Residential. Shops at Quarterfield is a 61,000-square-foot neighborhood center anchored by Aldi and LA Fitness, which is 100% leased. The One Loudoun residential project added 378 multifamily units to our exceptional development project in Loudoun County, one of the wealthiest counties in the country. As a company, we now have a financial interest in over 1,600 multifamily units, and we're in discussions with joint venture partners to add up to an additional 1,000 units over the next few years.

The One Loudoun apartments are approximately 90% leased, which is outperforming our initial expectations on base rent and absorption, which highlights the multiuse demand at One Loudoun. Both projects were seamlessly transitioned during the merger. And with $80 million remaining to spend on our active developments, we are very comfortable with our outstanding capital commitments in relationship to our balance sheet position. KRG is executing on each strategic initiative we laid out when we announced the merger.

As the top five open-air shopping center REIT, our increased relevance to our customer is clearly evident in the strong leasing volumes at outsized spreads. In turn, we are adding high-quality tenants and brands to enhance the merchandising mix in our portfolio. We're also making progress on the value creation opportunities through completing the active developments and determining the best use for our land bank. Each strategic benefit is operating on the shoulders of a rock-solid balance sheet with our net debt to EBITDA now standing at 5.3 times, one of the lowest in the sector.

We've often been asked to compare the performance of legacy KRG and legacy RPAI assets. Both internally and externally, we're reticent to bifurcate the two portfolios because they now operate as one. That being said, the extreme accretion associated with the merger was not just a function of the attractive deal terms. Bottom line, across every meaningful metric, the legacy RPAI assets have benefited from the KRG operating platform.

For example, for the first three and a half years prior to KRG's ownership, the legacy RPAI portfolio achieved non-option renewal spreads of 4%. Since the merger closed, non-option renewal spreads have been 13%. This is a prime example of how KRG has been able to create more pricing friction and significantly increase rents across the very high-quality portfolio from RPAI. Moreover, since we executed the merger, on a year-over-year basis, KRG has increased FFO by 44%, increased our lease percentage by 230 basis points, all the while delivering double-digit blended comparable cash lease spreads and increasing our ABR per square foot by 6%.

We've also improved key demographic metrics, including three-mile average household income up 13% and three-mile population up 34%. I give these metrics to drive home the point that the underlying quality of our portfolio has undoubtedly improved and our results speak for themselves. Our team is laser-focused on continuing to produce strong operational results to prove that we have a best-in-class portfolio with outsized opportunities for future growth. The culminate of all the great things I've just discussed is allowing us to raise our 2022 FFO as adjusted guidance to a range of $1.80 to $1.86, a $0.06 increase per share at the midpoint.

We're also raising our 2022 same-property NOI growth assumption to a range of 3.5% to 4.5%, an increase of 1.25% at the midpoint. As always, I'm very proud of the KRG team not only for their results but for their extreme hard work and dedication and competitiveness. KRG is nothing without our people and our collective efforts. We've accomplished a lot of the team, but our best days absolutely lie ahead.

I will now turn the call over to Heath to provide more color on the quarterly results, etc.

Heath Fear -- Executive Vice President and Chief Financial Officer

Good afternoon, and thank you for joining us today. Our second-quarter results are so compelling, I'm going to skip the cultural introduction and dive right in. For the second quarter, KRG generated $0.49 of FFO per share, both on a NAREIT and on an as-adjusted basis. As compared to NAREIT, our as-adjusted FFO results exclude the positive impact of $1 million of prior period collections.

Same-property NOI grew by 3.8% this quarter with 290 basis points of this growth being driven by contractual rent bumps, increased occupancy and an increase in net recoveries. As you may recall, we had budgeted our same-store results to be muted in the second quarter and accelerate to the back half of the year. Due to our continued leasing outperformance, lower levels of bad debt and expense timing our same-store results this quarter beat our internal budget. Given our same-store guidance was increased to 4% at the midpoint, it is safe to assume that our same-store growth for the balance of the year is expected to be largely in line with what we experienced this quarter.

As John noted earlier, we are raising FFO as adjusted guidance by $0.06 at the midpoint to a range of $1.80 to $1.86 per share. The variance from NAREIT FFO is approximately $0.01, which represents $2 million of prior period collections to the second quarter, offset by our estimate of $4 million of nonrecurring merger-related costs. Approximately $0.03 of the increase are attributable to same-property NOI in the form of leasing outperformance, lower bad debt and a higher retention rate. The other $0.03 are primarily attributable to unbudgeted land sale gains and termination fees.

Our full-year guidance does not include any additional material amounts for these recurring but unpredictable items. Furthermore, at the midpoint of our FFO as adjusted guidance, we lowered our bad debt assumption to 1% of revenues, which is at the high end of our historical bad debt run rate. Our balance sheet and liquidity metrics not only remain strong but continue to improve. Our net debt-to-EBITDA is 5.3 times, down from 5.7 times last quarter and down from 6.4 times from the same period in 2021.

Our steady decline in leverage is not only an indication of our commitment to a strong balance sheet position, but evidence of the EBITDA growth we've experienced to date. In addition to record low leverage for KRG, we had two key capital market transactions closed subsequent to quarter end. We increased the borrowing capacity on revolving credit facility to $1.1 billion from $850 million, which is a more appropriate size for the company. Our revolving credit facility is currently undrawn.

We also issued a seven-year $300 million unsecured term loan, which is being used to address 2023 maturities and slots nicely into our maturity ladder. In connection with the loan, we entered into a three-year swap, which fixes the interest rate at approximately 3.9%. Currently, only 7% of our debt is floating rate. It's important to note that together, these two transactions serve to eliminate our refinancing risk through 2023.

Once the volatility has worked its way out of the fixed income space, we look forward to reembracing the public debt markets. Until such time, we have a variety of liquidity levers to finance our business at competitive rates. Our balance sheet is in a phenomenal position to not only weather any storm, but to also think of as any opportunities that present themselves. Thank you to everyone for joining the call today.

Operator, this concludes our prepared remarks. Please open the line for questions.

Questions & Answers:


Operator

[Operator instructions] The first question is from Floris Gerbrand Van Dijkum.

Floris Van Dijkum -- Compass Point Research and Trading -- Analyst

Yes. Sorry. The connection was a little bad there. So you guys just had -- reported killer spreads, strong lease volumes.

You are showing 44% accretion based on the RPAI transaction. I'd love to get your comments on why you think your stock price is where it is today?

John Kite -- Chairman and Chief Executive Officer

Floris, great question. Look, from our perspective, we knew when we did the transaction that due to many reasons, but particularly the size and complexity of doing a transaction like that, that there would certainly be plenty of -- it would be pretty easy to step back and say, well, we'll see what happens, right? Let's see what these guys can do. It's more of a show-me story, and I think we understood that. So now for the last basically two and two-thirds quarters, we've been a combined company.

And we have absolutely shown that, and we've shown that we were -- the thesis behind this, the thesis behind the combination was absolutely correct. And we've now been able to demonstrate pretty concretely that was a great transaction. So look, that being said, the market when it looks at a show me, it wants lots of data, and we think we've delivered it. We're not going to sit here and say what we think specifically the price should be.

That's more of your job and the investment community's desires. But I think candidly, when you look at the data that we give you, you look at the NAV page, for example, that we put in our sub that not everybody does, which gives you a very [Inaudible], you could simply insert a market cap rate for quality shopping centers such as ours, a market cap rate for high-quality ground leases. And I guarantee you that would spit something out between $26 and $30, let's say. And then you look at earnings multiples from real competitive peers that are generally between 14 and 16 and you look at where our multiple is.

So that's another metric that you could just easily kind of come up with that same range of number. And then just NAVs that are published by the Street and price targets, etc. So everything correlates into a much higher stock price we think we'll get there. We do understand that people want to make sure that we were capable of taking on something that's complex and this quickly integrating.

But it's because of the -- it's what I said before, Floris. It's the people that we have. It's the people that are now part of this combined entity. You know these people pretty well.

It's not only a competent group, but it's a very competitive group. So I think that that will come shortly, but certainly, phenomenal opportunity as we sit here today for investors.

Floris Van Dijkum -- Compass Point Research and Trading -- Analyst

And maybe if I can follow up with -- you guys have an incredibly -- probably your strongest balance sheet or financial health that you've had as a public company, at least as far as I can recall. And obviously, the market is in a little bit of a flux right now as people try to grapple with what higher interest rates and potentially higher cap rates could mean. Where do you think could be -- you could find some interesting opportunities, maybe not today, but down the road in your existing markets? And where do you think you could potentially deploy some capital?

John Kite -- Chairman and Chief Executive Officer

Sure. I mean, in terms of specifically looking at opportunities within the markets, I think we've kind of demonstrated our ability to do that pretty effectively just this year. As I mentioned on the call, we sold a couple of properties and bought properties in a very accretive manner. I mean selling -- for example, the property that we sold in Chicago, and I used the word at an extremely accretive cap rate relative to our blended 5.75.

And I mean extremely. We can do that. I mean we have that ability to kind of pair those trades. That's our focus right now, Floris, because of the disconnect in the equity value, we're going to be smart about it.

We're going to look to pair some trades. And the fact that we've been able to buy in Dallas and Las Vegas and now Boca, sell an asset in Chicago, we like that trade. And -- so I do think there are opportunities. And by the way, as I mentioned on the prepared remarks, buying something in the mid- to high five that has a growth trajectory that the ones that we did have, we can still deliver high sevens, eights IRRs.

So I think that's very intriguing. But when we're looking at capital allocation, let's be clear, we still have a lot to do in terms of lease-up. And it's great because it's just future upside, but we're going to be spending significant capital in the balance of this year and all the way through next year in lease-up. But if you just look at the returns, Floris, like, for example, of all the deals we did this quarter, I think we did like 180, whatever, almost 190 total deals, our return on capital averaged 24%.

Tough to beat that, right? So that's the focus. We have the development pipeline that we have another $80 million to spend. We've been doing great there as well, and these are super high-quality projects. So we look at sources and uses across the board when we think about capital allocation, and we look at returns, right? So I don't know, I was on a long-winded answer, but a lot of opportunity there.

Floris Van Dijkum -- Compass Point Research and Trading -- Analyst

I can tell from your response, you're clearly passionate about the opportunity in hand.

John Kite -- Chairman and Chief Executive Officer

Absolutely. The whole team is.

Operator

[Operator instructions] Our next question comes from Craig Mailman with Citi.

Craig Mailman -- Citi -- Analyst

A quick question. On the lease to occupied spread, it kind of contracted quarter over quarter, but your S&O value went up $4 million. Is that just a function of the Loudoun Residential and the activity there? Or is there something else going on with underlying kind of rent levels?

Heath Fear -- Executive Vice President and Chief Financial Officer

No. I just think -- first of all, it's the mix of what's open and what's being signed basically is why that contracted, but the spread came out. Basically, what it's saying, Craig, is that we are starting to ramp up our opening activity, so that's opening at a swifter pace than we're leasing. Again, but it all has to do with what mix of deals are you opening, what mix of deals are you signing.

So -- Yes, the total amount increased, but the spread has contracted.

Craig Mailman -- Citi -- Analyst

OK. And then you guys lowered your bad debt expectations. I'm just curious if -- is that tied to any one tenant you -- that way -- a different way than what you had thought? And could you just give an update on kind of what the watch loss looks like?

Heath Fear -- Executive Vice President and Chief Financial Officer

No. I think the reason we lowered it from one and one-quarter to one is because we've got six months under our belt now. And so our need to be conservative for a full year versus a need to be conservative for six months is different. So again, I think it's basically just taking our actual bad debt results and continuing to have a nice conservative outlook for the remaining of the year.

Now we blend down to 1%. So I don't think there's any -- there's no particular tenant. There's no one that we're worried about. Again, as John said, with record bankruptcies, Sure, there are some folks on the watch list, but the watches is certainly much smaller than it was pre-pandemic.

So we still feel very good about our collection rates and our bad debt levels going through the balance of the year.

Operator

[Operator instructions] Our next question is from Todd Thomas with KeyBanc Capital Markets.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

First question, I just want to follow up on the SNO pipeline, I guess, the leasing backlog. And I'm just curious, given the pipeline, for leasing today in tenant demand today, do you expect to see the SNO pipeline continue to grow from here? Or do you think it sort of peaked as commencements might accelerate in the back half of the year?

Tom McGowan -- President and Chief Operating Officer

Todd, I think we see it being relatively flat. I think the next quarter, we'll see some nice growth on the anchor side. But I think our cadence of tenants coming in begin paying rent, that's going to be at a pretty good clip as we -- we opened 61% of that SNO number in 2022 and the balance of '23. So we think it's pretty steady, but -- we love the volume, we look the size of the SNO, and we expect to maintain that level.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And then you touched on sort of the developments and the pipeline a little bit in your prepared remarks, but I'm just curious if you could talk a little bit more about the pace of development leasing and demand for space at the projects in the active pipeline? And also whether you potentially move forward sooner than expected on any future projects that are in the -- I guess, the entitled land pipeline.

Tom McGowan -- President and Chief Operating Officer

Well, just to touch on a few. Land is a tradition. That was a fresh market ground-up deal with some small shop that is moving very rapidly. We expect that project to move into full occupancy as scheduled in our original pro forma.

The Loudoun commercial, I was there last week. It's moving along extremely well with a group of tremendous tenants, Sephora, Lululemon, just a great lineup. So that's going well. So we're really on pace in terms of what we're expecting out of that portfolio.

Then to the second part of your question of some of the future opportunities we haven't locked that we expect to report on in the next quarter, and we're making progress the Carillon we're making progress at One Loudoun in terms of some of our rezoning activities. Hamilton Crossing is one where we'll likely see strong activity in the next quarter. But I think for the most part, we're very pleased with where we are. but we're going to probably hold off and provide more information next quarter on a lot of good things happening in that way.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And then, Heath, two questions for you. One, it looked like net recoveries contributed to same-store growth in the quarter. And I know the portfolio has a relatively high percentage of fixed cam leases.

And so it looks like pretty solid expense controls overall in the quarter. Do you expect to see a positive contribution going forward throughout the balance of the year? Or do you expect a little bit more volatility in terms of expenses and recoveries?

Heath Fear -- Executive Vice President and Chief Financial Officer

So, Todd, the answer is sort of yes and no. As occupancy increases, obviously, we'll see net recoveries go up However, as I mentioned in my remarks, we had some timing in the second quarter is getting pushed into the other putters, which helped contribute to our outperformance on same-store in the second quarter. So you'll have that sort of offsetting the occupancy increases will be the fact that we'll be spending more in the back half of the year. see increases will be the fact that we'll be spending more in the back half of the year.

Operator

[Operator instructions] Our question comes from Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb -- Piper Sandler -- Analyst

Two questions, both sort of tackling something from two different ways. John, the -- all the retail calls have been super strong. On David's call, he spoke about maybe some issues with team and value, but your call obviously very bullish. Are you seeing any impact at all, any part of the retail or restaurant or a tenant spectrum, meaning like, are you seeing value customers pulling back or those tenants pulling back? Or just everything across every tenant that Tom brings you, you're like it's gold, it's great, let's do it?

John Kite -- Chairman and Chief Executive Officer

Absolutely. No, Alex, I think, look, there's a lot of narrative out there, but our performance is our performance. It's been very strong. When we look at what's going on in Q3, there's really not anything that we see happening day by day in Q3 that is different than what happened in Q2.

There's very strong demand. And the one great thing about the open-air platform is that we have such a diversity and particularly our platform, I should say. We have a really big diversity of tenants that we deal with on a daily basis. And -- it's just across the spectrum.

So your specific question about value, I've seen that commentary around value retailers, but look at the value retailers that we're dealing with and the strength of those companies like a TJ or a Ross or Burlington, any of the guys that are in that category are very strong. And as I said on my prepared remarks, they don't make real estate decisions based on short-term environments. They are making long-term decisions. So is it possible that over the next few quarters, there would be a crack here or there.

Of course, it's possible. But in terms of what we're seeing and what we're hearing every day, I mean, there's absolute demand for the space, which is the friction that's creating the pricing power. So at this point, I don't see any kind of material crack at all. Suffice to say, things change.

But right now, Alex, its -- business is continuing to be very strong.

Alexander Goldfarb -- Piper Sandler -- Analyst

So let me ask you from this angle. Some of the retailers -- I mean, some resales having great results, great earnings, great prints. Others, it's been on the opposite side. as you talk to your compadres at the tenants at the retailers and especially the ones where they aren't having such good earnings, are they seeing anything different? Or -- I'm just trying to understand and especially as it impacts the stocks, when retailers print bad numbers, everyone goes, "Oh, sell the landlord." And I'm just trying to understand the linkage if there is one, and if you're seeing anything.

John Kite -- Chairman and Chief Executive Officer

Yes. I mean, it's a bit of a second derivative in that regard, right, because there is enough strength and against a backdrop of relatively low supply. So sure, if there is a particular retailer that may have a problem, we, at this point, have others that want the space. I mean anytime in the last year plus, where there's been a well-documented struggling retailer who we get inbounds, can we review all those spaces that you have with XYZ tenant? That continues.

So I mean, you've talked about this in the past, Alex. I mean there has been almost no material addition to high-quality retail real estate in the last 15 years. So that is a massive part of this equation. And I think it enables us to kind of be selective.

Operator

[Operator instructions] Our next question comes from Chris Lucas with Capital One.

Chris Lucas -- Capital One Securities -- Analyst

Just a couple of questions, if I could. Heath, just on the recovery numbers. I guess I'm just curious as to whether or not you're starting to see any positive impact from sort of the type approach to the RPA portfolio in terms of the recovery metrics.

Heath Fear -- Executive Vice President and Chief Financial Officer

Yes, Chris. There's a couple of forms. Obviously, just in scale, being able to purchase and scale and procure and scale. So we're just running the entire organization and the entire portfolio more efficiently.

And then just taking some of our best practices principles like fixed can, for example, and we're starting to convert a lot of the legacy RPAI leases into fixed cam. Our conversion ratio so far this year is around 84%. And so those have absolutely been helping with the recovery ratio. So in general, and I mentioned this before, you'll see our NOI margin start to improve.

And every 25 basis points of NOI margin improvement over this portfolio is $0.01 of FFO. So as we have more time with this portfolio and we start applying our operating standards and our operating platform, you should see those numbers revert back to historical Kite norms, which were sort of 75% on the NOI margin, and high 80s on recovery ratios. So we think this is a gift that keeps on giving. With that said, Chris, it's not an overnight game.

It's going to take us several years to get the portfolio back to the historical ratios we had before.

Chris Lucas -- Capital One Securities -- Analyst

Great. And then, John, you talked about the sort of diversity of your portfolio, geography, product type, I guess I'm just curious, given the demand, is there one area that you would highlight as being particularly strong, whether it is product type or geography or box size that you say, "look, that's where we're killing it."

John Kite -- Chairman and Chief Executive Officer

Sure, Chris. I mean, again, I think -- look, in the mixture of assets that we have, we have really strong performance across the board. I mean, there's no doubt that in the last couple of quarters, lifestyle and mixed-use assets have generated extremely positive rent growth. But that's to be expected with the reopening and things of that nature.

So that would be an area I look at that I think has been extremely positive. By the same token, some of the spreads we've gotten in the box spaces, which are a little more power-oriented have been very, very strong. Again, lack of supply, strong demand. And it's why we have continued to say we love the mixture of assets that this combination has created.

And I think it's second to none. I mean we can compete with anybody on quality, which is why I tried to mention in my remarks, the increases in quality are equal to the increase in FFO, OK? So I want investors and analysts in particular, to focus on that one. The focus on the fact that these results don't just come. We drive hard, but these are great assets.

So we love the composition.

Chris Lucas -- Capital One Securities -- Analyst

And then, I guess, last follow-up question relates back to the capital allocation question. You've got a strong SNO pipeline that will start producing actual commencement rents over the next several quarters. Just on that alone, should drive your leverage levels down, trading somewhere north of 7% on an implied cap rate. Where do buybacks fit in your thought processes at this point?

John Kite -- Chairman and Chief Executive Officer

Yes, Chris, I mean, good question. Obviously, when we look at buybacks of stock, we look at that from -- with a lens of extreme intensity around capital allocation and sources and uses and balance sheet strength. So -- and the one thing that Heath mentioned in his call or in his prepared remarks was that literally up until a week ago, we were looking at $500 million of debt maturities, plus or minus in 2023, with having to understand what the solution to that is. The public debt market, obviously went away.

We were able to execute. The team was able to execute a fantastic term loan. And we enhanced the -- or we grew the line of credit by $250 million capacity. Just that capacity and the $300 million term loan would address that risk.

So while that risk was out there, we were going to be very cautious around that. On top of that, we have, as we mentioned, you go back to COVID, and one of the things that people may have forgotten is that we took a bigger hit on occupancy really than any peer. But yet our NOI disruption wasn't as bad, right? And our rent collection was outstanding. So we're filling that space.

That takes a lot of capital. That's another capital allocation thought process that we look at. And as I said on the call or on the remarks, we're generating 20-plus percent spreads on most of that capital in terms of TIs and lease up. So it's in the hopper.

We're looking at it. and we wanted to get this behind us. Now it's something that we're going to take a much more thoughtful look at. And we'll see.

We'll see where it goes. It's definitely something that is a potential, Chris, but we're going to have to -- we're focused on leasing up space and generating returns as well.

Operator

[Operator instructions] Our next question comes from Richard Milligan with Raymond James.

Richard Milligan -- Raymond James -- Analyst

Most of my questions have been answered, but I wanted to focus on the balance sheet a little bit. Heath, next year, you have about $250 million of debt maturing. Just curious what the average interest rate is there. And where do you think you can refi that today?

Heath Fear -- Executive Vice President and Chief Financial Officer

Yes. So. R.J., that is probably around between 4% and 4.5% remaining for the balance of 2023. And again, as we mentioned, we're looking forward to the bond market ethane, in which case we'd like to be out in the public bond market late this year, early in 2023.

The good news is, R.J., and you'll see this disclosed in our Q is that we ended up doing a trade-in late December of last year, where we did a forward swap and basically locked in the 10-year at 154 basis points. So when we go out to do a new deal, wherever the 10-year is, we'll have obviously this great trade. And so we think that we can probably refinance that debt, the new bond issuance, again, taking into account this forward, somewhere around between four and four and a quarter. So it should be relatively neutral in terms of interest expense and our ability to replace that debt for 2023.

Richard Milligan -- Raymond James -- Analyst

OK. That's helpful. And going back to my notes from the announcement of the RPAI merger, certainly wasn't a big hammering point and I don't think you guys spent a lot of time talking about refi-ing RPAI's debt, but -- has the higher interest rate environment changed any of your accretion expectations, given obviously the higher debt costs and was -- how big a part of the story or thesis was that?

Heath Fear -- Executive Vice President and Chief Financial Officer

Again, over the next several years, R.J., it seems like it will be relatively flat. And when we modeled where we thought we'd be issuing debt at when we were analyzing the merger, it was obviously at rates that are lower than they are now. However, I don't think it's moving the accretion needle so materially that we wouldn't have done the transaction. I think interest rates could be even higher than they are now and that this transaction based on the extreme accretion still makes sense.

So yes, we underwrote lower debt costs. But we have so much tremendous cushion on accretion that we're still feeling amazingly good about the transaction.

John Kite -- Chairman and Chief Executive Officer

Yes. I would just add to that, R.J. Definitely has not impacted what the results are going to be from the combination. In fact, as you can see, the NOI growth, the rent growth, the speed of leasing, those things are better than what we projected.

And of course, the quality of real estate I really want to hammer home the quality of the real estate is evident in the results. So we're hoping that the NAV accretion jumped out at people because that's significant.

Richard Milligan -- Raymond James -- Analyst

So I guess, fair to say that the outsized sort of fundamental performance versus underwriting, it far offsets the higher interest rates versus underwriting?

John Kite -- Chairman and Chief Executive Officer

That's a good way of looking at it. Yes.

Operator

[Operator instructions] Our next question comes from Anthony Powell of Barclays.

Anthony Powell -- Barclays -- Analyst

Question on leverage. You talked a few times about going down to 5.3 times. You have some leasing capital, some development, maybe supplier buybacks. What's your current comfort level taking that up as you pursue these opportunities at this point in the cycle?

Heath Fear -- Executive Vice President and Chief Financial Officer

Anthony, our long-term target is somewhere between five and five and a half. So very, very happy where we are at 5.3. I will say that, obviously, the leasing spend will start to increase as we start to turn on that $41 million of sign-on open. So I wouldn't be surprised to see that leverage level creep up maybe to 5%, 6% or somewhere around that neighborhood toward the end of the year.

But even at five, six, we feel very, very comfortable in this current environment. It's this attractive balance sheet that really allows us to -- as John said, to ignore these -- the growing course of uncertainty and just really focus on operations. So we -- our balance sheet is in great shape. We're going to take care of our maturities, and we're just going to keep executing and taking advantage of the current environment.

Anthony Powell -- Barclays -- Analyst

So maybe one more, just we hear all the time concerns about retailers in this environment. What are you looking for to get more conservative? What kind of tenant conversations would you be flagging to see some weakness? Would it be coming from larger tenants, small shops? I'm just curious kind of what tenants you think would show weakness in this environment first? And what are you monitoring?

John Kite -- Chairman and Chief Executive Officer

I mean, look, at this point, we're not seeing a lot of weakness. I know people want to see it, but we're not seeing it. I think it really depends on the particular segment that we're talking about. We monitor everybody -- there's -- you hear names that are struggling with some of their restructuring like a Bed Bath or whatever.

But we continue to be very well positioned there with our real estate, right? So I think, to be honest, Anthony, this is opportunistic really. Some of these tenants who are struggling candidly have lower rents -- we went through this with Stein Mart. We were so -- unfortunately, COVID was why it happened, but we got back those spaces, and we've released them at really strong spreads. So we're totally comfortable with getting some space back because the demand exceeds the supply there.

So -- tom anything you want to add?

Tom McGowan -- President and Chief Operating Officer

Yes. I mean you hear sometimes conversations about fast casual because you have the pressure of cost of goods sold, you have labor. But I think across the board, we're seeing these type of customers not trading down. And I think Chipotle is a great example where you're seeing people stay sticky within their lines and not trading down, which is a great sign for the consumer as well as our customers.

But we're going to always watch those four-wall numbers. We're going to always watch held ratios, which we do as a standard practice. But so far, we like how the consumer has been sticky and staying in their lanes.

Operator

[Operator instructions] Our next question comes from Craig Schmidt, Bank of America.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

There was a big pickup, obviously, in small shops in terms of lease. I'm wondering if the month of July and August, are you still seeing healthy appetite despite the macro headwinds?

John Kite -- Chairman and Chief Executive Officer

Yes. Absolutely. We're still seeing a healthy appetite. When we look at the quarter, it just happened, Craig, I mean we -- as I said, we did -- a little over 1 million square feet of leasing.

The average size of those leases, there were 186 deals, average size was 6,000 feet. So that means we're encompassing all kinds of different retailers. And when we look at, as I said, I mean we're basically sitting here in the third quarter. We're through July.

The leasing pace remains. We had a real estate committee last week with 20 deals. We got one next week with 20 deals. So -- and again, I know that people want some negative news to fit their narrative, but the reality is this is a strong business.

We have a lot of choices, and we have fabulous real estate that generates top-tier results for the last two-plus quarters. So still looks pretty good.

Tom McGowan -- President and Chief Operating Officer

Yes. And just to be a little more specific, we're at 89.3 right now from a small shop occupancy perspective, we're up quarter-over-quarter 80 bps, which was an strong quarter. And the best part of that is we still have 320 basis points to get to a high-level mark prior to the pandemic, which shows a lot of growth yet to come. But John has hit it right its diversity.

We can cover all forms. It's not the dry cleaner subway center anymore. We are drawing from everybody which gives us just great opportunities across the board.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Do you think you could break 90% by year end?

John Kite -- Chairman and Chief Executive Officer

I mean, of course, we could. I mean we're just a matter of continuing to push. But Craig, we've never been focused on that -- the metric of where the lead percentage is. It's more about what's the quality, what's the cash flow growth we're going to generate out of those deals.

So we're not going to say exactly what we think it will be because that's just a fool's errand. I mean we really want to get the best possible tenants and continue to grow cash flow. So we'll see where it is at year end, but there's no doubt in the next year, year and a half. We want to get back to where we were.

I mean there's no question and then begin to exceed that.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Great. And then just a question more out of curiosity. Why aren't more of your redevelopment projects located in the Sunbelt?

John Kite -- Chairman and Chief Executive Officer

it's just a factor of where we are right now. It's not anything beyond that. And of course, a lot of what's going on in the development pipeline right now is vis-a-vis the combination of the two companies and what large projects were active underway with the legacy RPI properties. But one of the projects we just did, as Tom mentioned, was the ground-up deal in Port St.

Lucie and the Fresh Market deal. So we have lots of opportunities in the Sun Belt and we will continue to find that. And in fact, when you look at the acquisitions that we just did, I would say that certainly, two of the three have significant potential for us to improve and add to -- so I would stay tuned on that. I think that will continue.

But the opportunity -- the word opportunity is that in itself, it's opportunistic, what presents itself, right? So we take them one at a time.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to John Kite for any closing remarks.

John Kite -- Chairman and Chief Executive Officer

OK. Thank you, everybody, for joining us. We really appreciate the time, and we look forward to talking to you in person soon. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Bryan McCarthy -- Senior Vice President, Corporate Marketing and Communications

John Kite -- Chairman and Chief Executive Officer

Heath Fear -- Executive Vice President and Chief Financial Officer

Floris Van Dijkum -- Compass Point Research and Trading -- Analyst

Craig Mailman -- Citi -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Tom McGowan -- President and Chief Operating Officer

Alexander Goldfarb -- Piper Sandler -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Richard Milligan -- Raymond James -- Analyst

Anthony Powell -- Barclays -- Analyst

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

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