Kite Realty Group Trust — Q1 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, for Kite Realty Group Trust and Kite Realty Group, L.P. The Company owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in selected U.S. markets. At quarter-end, it owned interests in 117 operating and redevelopment properties and three development properties under construction.
Kite Realty Group Trust owned approximately 98.1% of the Operating Partnership at March 31, 2015. The Company’s results are not directly comparable with the prior-year quarter because of the July 2014 Inland Diversified merger, which added 60 operating properties and approximately $0.9 billion of debt.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $86.8 million | $42.7 million | +$44.2 million |
| Operating income | $18.5 million | $5.2 million | +$13.3 million |
| Income from continuing operations | $4.5 million | $(2.2) million | +$6.7 million |
| Consolidated net income | $7.9 million | $4.5 million | +$3.4 million |
| Net income attributable to common shareholders | $5.1 million | $2.2 million | +$2.8 million |
| Basic and diluted EPS | $0.06 | $0.07 | Prior year included $0.10 from discontinued operations |
| FFO allocable to the Company | $41.3 million | $12.4 million | +$28.9 million |
| Adjusted FFO of the Kite Portfolio | $42.3 million | $17.5 million | +$24.8 million |
| Cash flow from operations | $45.1 million | $6.5 million | +$38.6 million |
Operating margin was approximately 21.3% in Q1 2015 versus 12.2% in Q1 2014. The improvement primarily reflects the larger post-merger property base and lower merger-related costs, partly offset by higher depreciation and interest expense.
Same-property NOI increased 4.4% to $26.0 million. Same-property leased occupancy was 95.1%, economic occupancy was 92.9%, and annualized base rent increased to $15.20 per square foot from $13.46.
At March 31, 2015, total assets were $3.76 billion, investment properties net were $3.41 billion, cash and cash equivalents were $126.7 million, and total debt was $1.57 billion. Debt had a weighted average interest rate of 3.83% and weighted average maturity of 4.8 years. Including hedges, approximately 74% of debt was fixed-rate.
The Company reported $282.4 million of availability under its $500 million unsecured revolving credit facility, plus approximately $147 million of potential additional capacity under the facility’s expansion feature. Net debt to annualized adjusted EBITDA was 6.2x. The Company was in compliance with its debt covenants at quarter-end.
The Board declared a common distribution of $0.2725 per share and Common Unit for Q1 2015 and a Series A preferred distribution of $0.515625 per preferred share.
Material changes versus the prior comparable period
- Revenue increased 104%, principally because properties acquired in the Inland Diversified merger contributed approximately $40.9 million of additional rental income.
- Interest expense increased 88.7% to $13.9 million, primarily because of debt assumed in the merger and financing for development projects.
- Depreciation and amortization increased 131.9% to $40.4 million due largely to the expanded property portfolio.
- Merger and acquisition costs declined to $0.2 million from $4.5 million in the prior-year quarter.
- The Company sold seven properties to Inland Real Estate Income Trust in March 2015 for $103.0 million of net proceeds and recognized a $3.4 million gain. Proceeds included $94.7 million held for future acquisitions.
- The Company acquired its partner’s interest in the City Center operating property for $34.4 million, funded primarily with a $30 million draw on the revolving credit facility.
- The Company amended its credit facility in March 2015 and released subsidiary guarantees after satisfying specified conditions.
- Cash used in financing activities was $66.6 million, compared with $3.1 million of cash provided in Q1 2014, reflecting debt repayments, the City Center investment and distributions.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that it expects sufficient liquidity to fund near-term maturities, development and redevelopment commitments, distributions and other operating requirements.
- $74.0 million of debt was scheduled to mature before December 31, 2015, excluding scheduled monthly principal payments.
- Four development and redevelopment projects under construction had estimated total costs of $176.3 million, with $57.1 million remaining to be incurred over approximately 18 months.
- The Company anticipated approximately $9 million to $11 million of additional major tenant improvements and renovation costs during the following 12 months.
- Potential earnout payments related to Inland Diversified properties totaled up to $8.9 million at quarter-end, with remaining expiration dates from November 2 through December 28, 2015.
- Interest-rate hedges had aggregate notional amounts of $373.3 million and a net fair-value liability of $7.3 million. A 100-basis-point change in rates on unhedged variable-rate debt was estimated to affect annual cash flow by approximately $4.0 million.
- The Operating Partnership guaranteed $63.0 million of debt associated with two consolidated variable-interest-entity joint ventures secured by $117.1 million of assets.
- Key risks include tenant credit and bankruptcies, retail and real estate market conditions, refinancing and interest-rate risk, property values, geographic concentration, development and acquisition execution, environmental liabilities, insurance costs and continued REIT qualification.
- On April 1, 2015, the Company acquired Colleyville Downs in Dallas, Texas, using $25 million of property-sale proceeds and a revolving-credit draw. The property was 92% leased and anchored by Whole Foods Market, Petco and Ace Hardware.
Most important facts for investors to verify
- Assess post-merger operating performance separately from portfolio expansion, including the 4.4% same-property NOI increase and occupancy trends.
- Verify debt maturity management, revolving-credit availability, covenant compliance and the effect of variable interest rates.
- Evaluate whether operating cash flow and recurring FFO adequately cover common and preferred distributions, capital expenditures and development commitments.
- Review the proceeds and strategic rationale for property dispositions, including the $94.7 million reserved for future acquisitions.
- Monitor remaining earnout obligations, joint-venture guarantees, letters of credit and other contingent commitments.
- Review the effect of the Colleyville Downs acquisition and future acquisition or disposition activity on leverage, liquidity and earnings comparability.