Kite Realty Group Trust — Q2 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. Kite Realty Group Trust operates through Kite Realty Group, L.P., a REIT focused on owning, operating, acquiring, developing, and redeveloping neighborhood and community shopping centers in selected U.S. markets.
- At June 30, 2018, the Company owned interests in 115 operating and redevelopment properties totaling approximately 22.5 million square feet, plus two development projects under construction.
- The Parent Company owned approximately 97.6% of the Operating Partnership; limited partners owned approximately 2.4%.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $91.7 million | $92.6 million | $181.5 million | $182.8 million |
| Operating income | $7.9 million | $21.1 million | $5.9 million | $29.2 million |
| Net income attributable to common shareholders | $(1.4) million | $10.2 million | $(19.3) million | $10.2 million |
| EPS, basic and diluted | $(0.02) | $0.12 | $(0.23) | $0.12 |
| Funds from operations attributable to common shareholders | $44.6 million | $45.1 million | $87.1 million | $88.0 million |
| Cash provided by operating activities | Not separately provided for the quarter | $82.0 million | $82.2 million |
- Approximate operating margin declined to 8.7% in Q2 2018 from 22.8% in Q2 2017; the six-month margin declined to 3.3% from 16.0%.
- Approximate net margin attributable to common shareholders was negative 1.5% in Q2 2018 versus 11.0% in Q2 2017, and negative 10.6% for the first six months versus 5.6% in the prior-year period.
- Same-property NOI increased 1.5% year over year to $53.9 million for the quarter and $107.5 million for the six months. Same-property leased percentage was 93.7%, and economic occupancy was 93.0%, both below the prior-year levels.
- Cash, cash equivalents, and restricted cash totaled $43.3 million at June 30, 2018, including $32.4 million of cash and cash equivalents.
- Mortgage and other indebtedness was $1.565 billion, compared with $1.699 billion at December 31, 2017. Reported weighted-average interest rate was 4.08%, with approximately 93% of debt classified as fixed-rate after considering hedges.
- The Company reported $459.1 million of availability under its unsecured revolving credit facility and compliance with applicable debt covenants.
- Cash distributions declared were $0.3175 per common share and Common Unit for the second quarter, up from $0.3025 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue declined 1.0% in Q2 and 0.7% for the six months. Rental income and tenant reimbursements declined primarily because of property dispositions and anchor vacancies, partly offset by improved shop leasing and $0.96 million of Q2 fee income.
- Q2 operating income declined $13.1 million, largely because of a $14.8 million non-cash impairment charge. Six-month operating income declined $23.3 million, reflecting $38.8 million of impairment charges versus $7.4 million in the prior-year period.
- Net loss attributable to common shareholders was $1.4 million in Q2 and $19.3 million for the six months, compared with income of $10.2 million in each 2017 comparison period.
- FFO attributable to common shareholders decreased modestly, by 1.2% for the quarter and 1.1% year to date, despite the GAAP loss.
- The Company sold Trussville Promenade and Memorial Commons for aggregate gross proceeds of $63.0 million and contributed three properties to a TH Real Estate joint venture at an agreed value of $99.8 million. It received $89.0 million of net proceeds and retained a 20% interest.
- Investing cash flow increased to $118.1 million from $38.1 million, primarily due to property disposition proceeds. Financing cash use increased to $189.0 million, reflecting debt repayments and distributions.
Guidance, outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance is provided in the filing.
- Four 3-R redevelopment projects were under construction, with estimated combined annualized returns of approximately 9.5% to 10.5% and expected aggregate costs of $36.5 million to $40.0 million through the end of 2018.
- The Company expected approximately $14 million to $16 million of additional major tenant improvement and renovation costs over the following 12 months. It also expected to incur approximately $8.8 million of remaining costs for two development projects over the next 12 to 18 months.
- In February 2018, a joint venture partner exercised redemption rights on $22.0 million of Class B interests. The Company redeemed $10.0 million on August 7, 2018 and was required to fund the remaining $12.0 million by November 8, 2018.
- The Company recorded $14.8 million of Q2 impairment charges on two properties after shortening the expected holding period. The fair value estimate of $30.4 million used Level 3 market-based inputs.
- Management identified risks from tenant financial condition and anchor vacancies, retail-sector and online competition, interest-rate volatility, refinancing and capital-market access, property values and impairment, geographic concentration, development and joint-venture execution, environmental and insurance matters, cybersecurity, and maintaining REIT status.
- The Company had no debt scheduled to mature before June 30, 2019, excluding scheduled monthly principal payments. It had $1.534 billion of company-share net debt and a reported net debt-to-annualized adjusted EBITDA ratio of 6.5x.
- The Company expects to recognize a right-of-use asset estimated at $35 million to $40 million upon adoption of the new lease accounting standard, although the full impact remained under evaluation.
- Management stated that there was no material litigation and that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether same-property occupancy and anchor tenant exposure improve following recent bankruptcies and property dispositions.
- The valuation assumptions supporting the $38.8 million year-to-date impairment charges and the potential for additional impairments.
- The funding source and effect of the remaining $12.0 million joint-venture redemption obligation due by November 8, 2018.
- Debt maturity concentrations beginning in 2021 and 2022, when scheduled and term maturities increase materially.
- Whether redevelopment returns, projected costs, and tenant improvement spending remain consistent with management’s estimates.
- The sustainability of distributions relative to FFO, operating cash flow, debt service, and required REIT distributions.