KRG

Business Context and Reporting Period

Kite Realty Group Trust (Kite) is a Maryland real estate investment trust (REIT) focused on the development, acquisition, and operation of neighborhood and community shopping centers. The reporting period covers the fiscal year ended December 31, 2004. Kite commenced operations on August 16, 2004, following its Initial Public Offering (IPO) and the consolidation of the Kite Property Group (the Predecessor). As of year-end, the Company owned interests in 30 retail operating properties (approx. 4.6 million sq. ft.) and five commercial operating properties (approx. 663,000 sq. ft.), with a portfolio occupancy rate of 95.3% for retail and 97.7% for commercial assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Expansion: The Company significantly expanded its portfolio through 15 property acquisitions in 2004, including Hamilton Crossing, Plaza at Cedar Hill, and Eastgate Pavilion, totaling approximately $152 million in purchase price (including assumed debt).
• Revenue Growth: Rental-related revenue increased from $12.8 million in 2003 to $20.3 million in 2004 (combined basis), driven by new acquisitions and the consolidation of Glendale Mall.
• Expense Increases: Total expenses rose to $30.1 million in 2004 from $26.4 million in 2003. Depreciation and amortization increased by 293% to $11.4 million, and interest expense increased by 121% to $9.3 million, largely due to the expanded asset base and new debt.
• Net Loss: Despite revenue growth, the Company reported a combined net loss of $(0.5) million for 2004, compared to a net income of $1.4 million in 2003. This was primarily due to $1.7 million in loan prepayment penalties and expenses related to the IPO and formation transactions.

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to pursue internal growth through development and targeted acquisitions. The Company has a development pipeline of nine retail properties totaling approximately 1.2 million square feet, with an estimated total cost of $102 million ($79 million incurred as of year-end). The Company declared a quarterly cash distribution of $0.1875 per share for Q4 2004.

Material Risks and Contingencies:

• Tenant Bankruptcies: Two significant tenants, Ultimate Electronics (2.6% of annualized base rent) and Winn-Dixie (1.7% of annualized base rent), filed for Chapter 11 bankruptcy in early 2005. Ultimate Electronics intends to close two stores by June 30, 2005.
• Glendale Mall: The Company's largest property (6.3% of annualized base rent) is 87% leased following a major tenant termination. Management is evaluating strategic alternatives, including redevelopment or sale.
• Debt Covenants: The Company is subject to financial covenants under its $150 million revolving credit facility, including leverage ratios and minimum tangible net worth. Distributions are permitted up to 105% of FFO under specific conditions.
• REIT Status: Failure to qualify as a REIT would result in significant corporate income taxes and reduced cash available for distribution.

Investor Verification Checklist

• Bankruptcy Impact: Verify the status of Ultimate Electronics and Winn-Dixie leases and the potential impact on cash flow if leases are rejected.
• Glendale Mall Strategy: Confirm the timeline and capital requirements for the redevelopment or sale of Glendale Mall.
• Debt Maturities: Review the schedule of debt maturities, noting that $21.1 million is due in 2005 and $71.0 million in 2006.
• Development Costs: Monitor the remaining $23 million required to complete the current development pipeline.
• Lock-up Expirations: Note that lock-up agreements for executive officers expire in May 2005, and operating partnership units become redeemable in August 2005, which could impact share price.