Kite Realty Group Trust 2014 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2014. Kite Realty Group Trust owns, operates, leases, acquires, redevelops and develops neighborhood and community shopping centers and selected office properties in the United States. At quarter-end, the Company owned interests in 129 operating properties and three development properties under construction.
The July 1, 2014 merger with Inland Diversified Real Estate Trust was the principal driver of year-over-year changes. The stock-for-stock transaction had an approximate value of $2.1 billion, including approximately $0.9 billion of assumed debt, and added 60 properties in 23 states.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $88.6 million, versus $32.6 million | $172.1 million, versus $93.5 million |
| Operating income (loss) | $(1.3) million, versus $5.7 million | $8.2 million, versus $20.0 million |
| Net income (loss) | $(14.0) million, versus $1.2 million | $(12.7) million, versus $(4.0) million |
| Net loss attributable to common shareholders | $(16.4) million, versus $(0.9) million | $(19.3) million, versus $(9.6) million |
| Net loss per common share | $(0.20), versus $(0.04) | $(0.39), versus $(0.44) |
| Funds from operations allocable to the Company | $24.3 million, versus $13.0 million | $50.2 million, versus $33.0 million |
| Adjusted FFO of the Kite Portfolio | $43.8 million, versus $13.1 million | $78.7 million, versus $34.8 million |
Approximate operating margins were negative 1.5% for the quarter and 4.8% for the nine-month period. Net margins attributable to common shareholders were negative 18.5% and negative 11.2%, respectively, based on reported revenue.
- Rental income, including tenant reimbursements, increased 188.9% in the quarter and 97.8% for the nine-month period, primarily from the Inland Diversified properties and prior acquisitions.
- Merger and acquisition costs were $19.1 million in the quarter and $26.8 million for the nine months, compared with $0.2 million and $0.6 million in the prior-year periods.
- Depreciation and amortization increased to $44.4 million in the quarter and $81.6 million for the nine months, largely due to the expanded property base and purchase accounting.
- Interest expense increased to $15.4 million in the quarter and $30.3 million for the nine months, principally because of assumed merger debt.
- Same-property NOI increased 4.7% in the quarter and 4.6% for the nine months. Same-property leased occupancy was 96.4%, and economic occupancy was 94.9% at quarter-end.
Balance sheet, cash flow, debt and liquidity
- Total assets were $4.01 billion at September 30, 2014, compared with $1.76 billion at December 31, 2013. Investment properties, net, were $3.39 billion versus $1.64 billion.
- Mortgage and other indebtedness was $1.56 billion, excluding $144.3 million of debt associated with properties held for sale. Including that debt and premiums, total consolidated indebtedness was approximately $1.7 billion.
- Debt had a weighted-average interest rate of 3.96% and weighted-average maturity of 4.9 years, excluding properties held for sale. Considering hedges, approximately 82% of debt was fixed-rate and 18% was variable-rate.
- The July 2014 amended revolving facility increased capacity from $200 million to $500 million, extended maturity to July 2018 and reduced pricing. Approximately $380.2 million was available for future borrowings at September 30, with an additional approximately $65 million of potential capacity from unencumbered assets.
- The $230 million term loan was amended to mature in July 2019, with reduced interest-rate pricing and potential expansion to $400 million.
- Cash and cash equivalents were $31.2 million at September 30, compared with $18.1 million at December 31, 2013.
- Operating activities provided $10.6 million for the nine months, compared with $37.0 million in 2013. Investing activities provided $89.2 million, versus $183.4 million used in 2013. Financing activities used $86.6 million, versus $146.1 million provided in 2013.
- Company share of net debt was $1.61 billion, and the reported ratio of net debt to annualized adjusted EBITDA was 6.56x.
Material changes, outlook and unusual items
- The Inland Diversified merger materially expanded the portfolio, revenue base, equity capitalization and debt obligations. The Company issued approximately 50.3 million common shares before the August 2014 one-for-four reverse share split.
- Management estimated approximately $17 million of annual operating expense savings from terminated contracts and other merger-related initiatives, but the filing does not provide a formal earnings or revenue guidance range.
- On October 30, 2014, after quarter-end, the Company received investment-grade ratings of Baa3 from Moody’s and BBB- from Standard & Poor’s, both with stable outlooks.
- Management expected to substantially complete Parkside Town Commons—Phase I in 2014; Phase II was under construction. Four development and redevelopment projects had estimated total costs of approximately $171 million, with $54 million remaining to be spent over the following 18 months.
- The Company expected approximately $12 million to $14 million of additional major tenant improvements and renovation costs during the following 12 months.
- Fifteen properties were classified as held for sale at September 30, with assets of $344.5 million and liabilities of $176.6 million. The planned sales to Inland Real Estate had aggregate consideration of approximately $318.1 million, subject to closing conditions and timing.
- Debt maturities included $59.1 million in the fourth quarter of 2014 and $152.9 million during 2015, including scheduled principal payments. Management was pursuing refinancing, repayment or maturity extensions.
- The Company guaranteed a $26.6 million loan for certain joint venture entities and had $7 million of outstanding letters of credit. Remaining property earnout obligations had a maximum potential payment of $15.0 million at quarter-end.
- Key risks include tenant credit quality and bankruptcies, retail demand, interest-rate volatility, refinancing availability, property values, development execution, geographic concentration, REIT qualification and integration of the Inland Diversified portfolio.
Most important facts for investors to verify
- Whether the planned property sales close on schedule and at the stated approximately $318.1 million aggregate price.
- Progress on refinancing or extending the $59.1 million fourth-quarter 2014 maturity and the $152.9 million of 2015 maturities.
- Realization of the estimated $17 million in annual merger-related operating savings.
- Post-merger occupancy, same-property NOI, leasing spreads and tenant reimbursement performance.
- Actual remaining costs and financing for the four development and redevelopment projects.
- Debt covenant compliance, availability under the revolving facility and sensitivity to higher short-term interest rates.
- The effect of merger-related costs, purchase-accounting depreciation and assumed debt on GAAP earnings versus FFO and adjusted FFO.