Kite Realty Group Trust: Q2 2014 Form 10-Q Summary
Business context and reporting period
Kite Realty Group Trust is a REIT focused on owning, operating, leasing, acquiring, developing, and redeveloping neighborhood and community shopping centers and certain commercial properties. This unaudited filing covers the three and six months ended June 30, 2014. At quarter-end, the company owned interests in 70 operating properties and three development properties under construction.
On July 1, 2014, after the reporting period, Kite completed its approximately $2.1 billion stock-for-stock merger with Inland Diversified, including approximately $0.9 billion of assumed debt. The combined portfolio increased to 130 operating properties.
Financial performance and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $40.8 million | $29.9 million | $83.5 million | $61.0 million |
| Operating income | $4.3 million | $0.2 million | $9.5 million | $8.9 million |
| Operating margin | 10.6% | 0.7% | 11.4% | 14.7% |
| Net income (loss) | $(3.2) million | $(7.3) million | $1.3 million | $(5.2) million |
| Net loss attributable to common shareholders | $(5.1) million | $(8.7) million | $(2.9) million | $(8.8) million |
| FFO allocable to the company | $13.5 million | $9.4 million | $25.8 million | $19.9 million |
| Adjusted FFO of the Kite portfolio | $17.4 million | $10.1 million | $34.9 million | $21.7 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $22.8 million | $25.1 million |
Q2 revenue increased 36.5%, primarily from 2013 property acquisitions, newly operational development properties, higher occupancy, rental rate growth, and improved tenant expense recoveries. Same-property NOI increased 4.4% in the quarter and 4.6% for the first six months. Same-property leased occupancy was 96.3%, compared with 95.9% at June 30, 2013.
Reported earnings remained pressured by depreciation and amortization, interest expense, and merger costs. Q2 merger and acquisition costs were $3.3 million; six-month costs were $7.8 million. Net income for the six months included $3.2 million from discontinued operations and a $3.5 million gain on property sales.
Balance sheet, debt, and liquidity
- Total assets were $1.75 billion at June 30, 2014, compared with $1.76 billion at December 31, 2013.
- Cash and cash equivalents were $22.6 million.
- Total mortgage and other indebtedness was $874.5 million, up from $857.1 million at year-end 2013.
- Considering interest-rate hedges, 68% of debt was effectively fixed-rate and 32% remained variable-rate. Total debt had a weighted-average interest rate of 3.58% and weighted-average maturity of 3.5 years.
- The company had $49.8 million available under its $200 million unsecured revolving credit facility at June 30, 2014, after outstanding borrowings and letters of credit. It was in compliance with applicable debt covenants.
- Operating cash flow was $22.8 million, while capital expenditures were $39.0 million. Net cash used in investing activities was $13.5 million, and net cash used in financing activities was $4.8 million.
- Company share of net debt was $800.5 million, and net debt to annualized adjusted EBITDA was 7.14 times under management’s non-GAAP calculation.
Material changes versus the prior comparable period
- Revenue increased by $10.9 million in Q2 and $22.5 million for the six-month period.
- Operating income increased by $4.1 million in Q2 but only $0.6 million for the six months because of higher depreciation, interest, and merger expenses.
- Q2 net loss attributable to common shareholders improved by $3.6 million. The six-month common loss improved by $5.9 million, aided by property-sale gains and the absence of the $5.4 million Kedron Village impairment charge recorded in 2013.
- FFO allocable to the company increased 43.6% in Q2 and 29.6% for the six months.
- Cash flow from operations declined $2.2 million year over year, primarily because of lower gains on outlot sales and working-capital timing.
- The company sold three properties during the first quarter for aggregate proceeds of $35.2 million and a net gain of $6.7 million.
- No operating properties or land for development were acquired during the first six months of 2014.
Outlook, management commentary, risks, and unusual items
Management expected additional leasing opportunities during the remainder of 2014 and cited improving occupancy, rental rate growth, and tenant recoveries. The Inland Diversified merger was expected to increase cash flow and liquidity, reduce the cost of capital, expand market presence, and generate approximately $17 million of annual operating expense savings. Total merger-related costs were expected to be approximately $27 million.
On July 1, 2014, the revolving credit facility was increased from $200 million to $500 million, its maturity was extended to 2018, and pricing was reduced. After a $20 million paydown, approximately $370 million was available, with approximately $64 million of additional capacity potentially supported by unencumbered assets. The $230 million term loan maturity was extended to 2019 and its pricing was reduced.
Five development and redevelopment projects under construction had an estimated total cost of approximately $183 million, of which $106 million had been incurred by June 30, 2014. The company expected to spend approximately $77 million over the following 18 months. It also expected approximately $10 million to $12 million of additional major tenant improvements and renovation costs during the next 12 months.
Near-term liquidity risks included $76.6 million of property-level debt scheduled to mature in the fourth quarter of 2014, principally related to Rangeline Crossing and Delray Marketplace. After quarter-end, the Rangeline Crossing loan was retired, while the Delray Marketplace loan remained subject to repayment, refinancing, or extension efforts.
Key risks include tenant financial condition and bankruptcies, retail and economic conditions, interest-rate volatility, refinancing and capital-market access, development and redevelopment execution, property impairments, geographic concentration, merger integration, REIT qualification, and environmental or other property liabilities. Interest-rate sensitivity analysis indicated that a 100-basis-point increase would reduce the fair value of fixed-rate debt by approximately $8.6 million and increase annual cash flow requirements on variable-rate debt by approximately $2.8 million.
Subsequent to quarter-end, the company issued approximately 201 million common shares in the Inland Diversified merger and approved a one-for-four reverse share split, expected to become effective August 11, 2014. The reverse split was not reflected in the June 30 financial statements.
Important facts for investors to verify
- Actual post-merger property performance, debt balances, integration costs, and achievement of the projected $17 million annual savings.
- Refinancing or repayment of the Delray Marketplace debt maturity and the company’s ability to manage scheduled debt maturities.
- Post-merger leverage, liquidity, covenant compliance, and the effect of assumed Inland Diversified debt.
- Progress, remaining costs, leasing, and financing for the five development and redevelopment projects.
- Whether same-property NOI and occupancy improvements continue after the merger and portfolio expansion.
- The impact of merger costs, preferred dividends, depreciation, and interest expense on common-shareholder earnings and distributions.
- The effect of the reverse share split and the substantially increased common-share count on per-share metrics.