Kite Realty Group Trust 2017 Form 10-K Summary
Business context and reporting period
The filing is a combined Form 10-K for Kite Realty Group Trust and Kite Realty Group, L.P. for the fiscal year ended December 31, 2017. The Company is a REIT focused on owning, operating, acquiring, developing and redeveloping neighborhood and community shopping centers in selected U.S. markets. At year-end, it owned interests in 117 operating and redevelopment properties totaling approximately 23.3 million square feet, plus two development projects under construction.
- The retail operating portfolio was 94.8% leased; small-shop leased percentage was 90.5%.
- No individual tenant represented more than 2.5% of annualized base rent; the largest 25 tenants represented 34.9%.
- The Parent Company owned approximately 97.7% of the Operating Partnership; debt is incurred at the Operating Partnership level.
Financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $358.8 million | $354.1 million | +$4.7 million |
| Operating income | $64.7 million | $65.4 million | -$0.7 million |
| Net income attributable to common shareholders | $11.9 million | $1.2 million | +$10.7 million |
| Net income per diluted common share | $0.14 | $0.01 | +$0.13 |
| Same Property NOI | $222.3 million | $216.1 million | +2.9% |
| FFO attributable to common shareholders | $170.8 million | $166.7 million | +2.4% |
| Cash flow from operating activities | $153.7 million | $154.9 million | -$1.3 million |
| Cash and cash equivalents | $24.1 million | $19.9 million | +$4.2 million |
| Mortgage and other indebtedness | $1.699 billion | $1.731 billion | -$31.8 million |
- Approximate operating margin was 18.0% and net margin was 3.3%; these GAAP margins were affected by depreciation, interest expense, impairment and property-sale gains.
- Interest expense was $65.7 million, essentially flat year over year.
- Net debt to adjusted EBITDA was 6.9x based on the Company’s definitions.
- Total distributions declared were $1.225 per common share, up from $1.165 in 2016. Approximately 24% of 2017 distributions were classified as return of capital, 65% as taxable ordinary income and 11% as taxable capital gains.
Material changes versus the prior comparable period
- Revenue increased 1.3%, supported by higher rental rates, occupancy, completed redevelopment projects and increased other property-related revenue.
- Same Property NOI increased 2.9%, or 3.2% excluding the impact of the 3-R initiative. Economic occupancy increased to 93.6% from 93.0%, while period-end leased percentage declined to 94.6% from 95.3%.
- The Company executed 393 new and renewal leases covering approximately 2.3 million square feet, producing a 9.0% blended comparable cash rent spread.
- Net income improved primarily because gains on property sales increased to $15.2 million from $4.3 million in 2016 and 2016 included $2.8 million of transaction costs. The 2017 results also included a $7.4 million impairment charge on one operating property.
- Four non-core properties were sold for approximately $77.7 million of gross proceeds and a $15.2 million net gain. Proceeds were used primarily to repay revolving debt and fund redevelopment.
- Capital expenditures declined to $70.5 million from $94.3 million. Financing cash use increased to $149.3 million, including $105.0 million of distributions to common shareholders and Common Unit holders.
- Parkside Town Commons—Phase II transitioned to the operating portfolio, seven 3-R projects were completed, and construction continued on seven additional 3-R projects.
Guidance, outlook, commentary and risks
- Management expects to deliver several additional development and redevelopment projects in 2018. Seven 3-R projects under construction had estimated remaining total costs within an overall project range of $71 million to $77 million and targeted combined annualized returns of approximately 8% to 9%.
- Four additional redevelopment opportunities were under evaluation with estimated costs of $40 million to $56 million and targeted returns of 9% to 11%. These estimates are subject to contingencies and may not be achieved.
- The Company expected approximately $14 million to $16 million of additional major tenant improvements during 2018, in addition to recurring operating and development expenditures.
- Management reported approximately $398 million of combined cash and revolving-credit borrowing capacity, consisting of $24.1 million of cash and approximately $373.8 million of available revolving capacity. The unencumbered asset pool was valued at approximately $1.4 billion.
- Debt was 92% fixed-rate or effectively fixed through hedges. Approximately $435.5 million of variable-rate debt was hedged. A 100-basis-point increase in rates on unhedged variable debt would reduce annual cash flow by approximately $1.4 million.
- Approximately $82.4 million of debt maturities were scheduled through December 31, 2020, including $37.9 million of secured debt maturing in 2018. The Company stated that it had sufficient liquidity to address the 2018 maturities.
- Key risks include tenant bankruptcies and credit losses, e-commerce competition, retail-sector weakness, geographic concentration in Florida, Indiana and Texas, rising interest rates, refinancing and covenant risks, property impairment, development cost overruns, joint-venture risks, environmental and insurance exposures, cybersecurity events and the ability to maintain REIT qualification.
- Subsequent to year-end, a subsidiary partner exercised a redemption right for approximately $21.9 million of Class B units. The Company expected to fund the redemption with cash and revolving-facility borrowings by August 2018, subject to a possible extension.
- The Company had no material litigation reported, was in compliance with applicable debt covenants, and management and the auditors concluded that internal controls over financial reporting were effective.
Important facts for investors to verify
- Reconcile GAAP net income with FFO and Same Property NOI, including the effects of the $7.4 million impairment and $15.2 million of property-sale gains.
- Review debt maturities, secured debt exposure, covenant headroom, revolving-facility availability and the effect of future LIBOR or other interest-rate changes.
- Assess leasing trends, the 2018 lease-expiration exposure of 7.1% of annualized base rent, tenant credit quality and exposure to challenged retailers.
- Validate the budgets, leasing assumptions, targeted returns and remaining funding requirements for the 3-R and Eddy Street Commons projects.
- Evaluate geographic concentration, particularly Florida at 24.6% of annualized base rent, Texas at 11.9% and Indiana retail at 11.7%.
- Monitor the $21.9 million Class B unit redemption, future distributions, REIT compliance and the expected effects of new revenue and lease accounting standards.