KITE REALTY GROUP TRUST annual report, FY2012

Business Context and Reporting Period

Kite Realty Group Trust filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The company is a REIT focused on owning, operating, acquiring, developing and redeveloping neighborhood and community shopping centers in selected U.S. markets, primarily through Kite Realty Group, L.P.

At year-end, the company owned interests in 54 retail operating properties totaling approximately 8.4 million square feet of total GLA, including non-owned anchor space, plus two commercial properties totaling approximately 0.4 million square feet.
The retail portfolio was 94.2% leased, compared with 93.3% at December 31, 2011.
Indiana, Florida and Texas represented approximately 70% of owned square footage and a similar proportion of annualized base rent, creating geographic concentration.
The company held six in-process development or redevelopment projects and four future projects, plus approximately 91 acres of land held for development.

Key Financial Metrics

Metric	2012	2011	Change
Total revenue	$101.1 million	$94.0 million	+7.5%
Rental-related revenue	$100.8 million	$93.6 million	+7.6%
Operating income	$21.2 million	$22.3 million	-5.0%
Operating margin	Approximately 20.9%	Approximately 23.7%	Down
Loss from continuing operations	$12.1 million	Income of $3.6 million	Unfavorable
Net loss attributable to common shareholders	$12.3 million, or $0.18 per share	$0.8 million, or $0.01 per share	Unfavorable
Same-property NOI	$57.3 million	$55.6 million	+3.2%
FFO allocable to the company	$27.5 million	$28.3 million	-2.9%
Adjusted FFO of the Kite portfolio	$32.0 million	$31.8 million	+0.7%
Cash provided by operating activities	$23.3 million	$32.2 million	-27.8%
Cash used in investing activities	$71.6 million	$86.5 million	Improved
Cash provided by financing activities	$50.8 million	$49.0 million	+3.7%

Net loss attributable to common shareholders was affected by preferred dividends, a $8.0 million non-cash remeasurement loss related to the consolidation of Parkside Town Commons, and other transaction and financing items. The filing does not present a conventional net profit margin as a primary management measure; based on reported figures, consolidated net loss was approximately 3.7% of revenue.

Balance Sheet, Debt and Liquidity

Total assets were $1.289 billion, including net investment properties of $1.200 billion.
Consolidated mortgage and other indebtedness was $699.9 million, compared with $689.1 million at year-end 2011.
Cash and cash equivalents were $12.5 million. The company reported approximately $67.0 million of availability under its unsecured revolving credit facility, for combined liquidity of approximately $79 million.
The $200 million unsecured revolving credit facility had $94.6 million outstanding at year-end and was scheduled to mature April 30, 2016, subject to an extension option.
A new $125 million unsecured term loan was entered into in April 2012 and matures April 30, 2019.
After hedges, approximately 72% of debt was fixed-rate or effectively fixed-rate and 28% remained variable-rate. A 100-basis-point increase in interest rates was estimated to reduce annual cash flow by approximately $2.0 million.
Debt maturities included approximately $29 million in 2013 and $78 million in 2014, excluding certain scheduled principal payments.
The company was in compliance with the financial covenants of its unsecured facility and term loan as of December 31, 2012.

Material Changes Versus the Prior Comparable Period

Rental income increased $7.3 million, primarily from newly operational development properties, 2011 and 2012 acquisitions, redevelopment activity and improved occupancy and rent spreads.
Same-property NOI increased 3.2%, while comparable-property leased occupancy rose from 92.8% to 93.7%.
The company executed 167 new and renewal leases covering approximately 955,800 square feet, including 517,500 square feet of new leases.
Operating income declined despite higher revenue because depreciation and amortization increased $5.7 million, interest expense increased $2.1 million, general and administrative expense increased $0.8 million, and the company recorded a $1.0 million net litigation charge.
Cash flow from operations declined $9.0 million, primarily due to higher cash outflows for accounts payable, accrued expenses and other liabilities and lower distributions from unconsolidated entities.
The company acquired Cove Center, 12th Street Plaza, Publix at Woodruff and Shoppes at Plaza Green for aggregate purchase prices of approximately $75.2 million.
The company sold nine non-core properties and land-related assets, generating gross proceeds of $87.4 million, including partners’ shares. Approximately $42.9 million was used to repay property-level debt.
Common shares outstanding increased materially following the October issuance of 12.1 million common shares for net proceeds of $59.7 million. The company also issued 1.3 million Series A preferred shares for net proceeds of $31.3 million.
In December 2012, the company acquired its partner’s 60% interest in Parkside Town Commons for $13.3 million and consolidated the project, resulting in the $8.0 million non-cash remeasurement loss.

Guidance, Outlook, Commentary and Unusual Items

Management stated that it would continue to strengthen the balance sheet, improve debt-to-EBITDA and other financial ratios, manage the operating portfolio aggressively and fund the development and redevelopment pipeline.
The six in-process development and redevelopment projects had estimated total costs of approximately $240.3 million, of which $166.1 million had been incurred by year-end; management identified approximately $74 million of remaining costs.
Management expected approximately $1.5 million of recurring operating capital expenditures and $10 million to $12 million of major tenant improvements and renovation costs over the following twelve months.
Management stated that it expected to address 2013 maturities through refinancing, repayment or extensions, but provided no assurance that financing would be available on satisfactory terms.
Subsequent to year-end, the company acquired Shoppes at Eastwood for $11.6 million and amended its unsecured revolving credit facility. The maturity was extended to February 26, 2017, with an option to extend to February 26, 2018, and pricing was reduced to LIBOR plus 165 to 250 basis points.
A wholly owned subsidiary was in payment default on a $29.5 million non-recourse loan because property cash flow was insufficient to cover debt service. The loan accrued interest at the stated 5.70% rate plus a 4.00% default rate, and the lender could call the principal. The lender had not indicated an intent to call the loan and had not provided a formal waiver.
The company’s common distribution was $0.06 per share each quarter, or $0.24 for the year. Approximately 93% of 2012 common distributions were classified as return of capital, approximately 7% as capital gains and approximately 0% as ordinary income dividends.
Key risks include tenant bankruptcies, weak consumer spending, retail-sector competition, refinancing and interest-rate risk, development cost overruns, geographic concentration, environmental and insurance exposures, REIT qualification requirements and potential impairment of real estate assets.

Most Important Facts for Investors to Verify

Whether the $29.5 million loan default was resolved, waived or called, and whether it created any subsequent liquidity or cross-default consequences.
The refinancing status and final terms of 2013 and 2014 debt maturities.
Actual remaining funding requirements, leasing progress, opening dates and stabilization performance for the development and redevelopment pipeline.
Whether occupancy and same-property NOI improvements continued after December 31, 2012, particularly in Indiana, Florida and Texas.
The sustainability of common distributions in light of recurring cash flow, preferred dividends, capital expenditures and debt service.
The effect of common and preferred equity issuance on per-share FFO, leverage and dilution.
The valuation assumptions supporting Parkside Town Commons and other real estate assets, including potential impairment risk.
Exposure to tenant concentration, lease expirations and anchor-tenant performance; 4.7% of annualized base rent and 5.0% of portfolio space were scheduled to expire in 2013.