Kite Realty Group Trust — Q2 2012 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2012, compared with the same periods in 2011. Kite Realty Group Trust owns, operates, leases, acquires, redevelops and develops neighborhood and community shopping centers and selected commercial properties through its operating partnership. At June 30, 2012, the Company owned interests in 62 properties, including 53 retail operating properties, five retail properties under redevelopment and four commercial operating properties, plus four in-process retail developments.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $25.1 million | $24.4 million | $50.9 million | $47.9 million |
| Operating income | $5.3 million | $5.3 million | $10.2 million | $10.0 million |
| Operating margin | 21.1% | 21.7% | 20.0% | 21.0% |
| Net income attributable to Kite | $(0.6) million | $0.4 million | $0.9 million | $(0.3) million |
| Net loss attributable to common shareholders | $(2.7) million | $(1.1) million | $(2.7) million | $(3.2) million |
| Basic and diluted loss per common share | $(0.04) | $(0.02) | $(0.04) | $(0.05) |
| Funds from operations allocable to the Company | $6.7 million | $7.5 million | $12.6 million | $13.6 million |
| Adjusted FFO of the Kite Portfolio | $8.0 million | $8.4 million | $15.9 million | $15.3 million |
Six-month operating cash flow was $11.2 million, compared with $15.0 million in the prior-year period. Investing activities provided $6.7 million, primarily because of $57.0 million of property and land sale proceeds, partially offset by $20.8 million of acquisitions and $31.6 million of capital expenditures. Financing activities used $19.6 million. Cash and cash equivalents ended at $8.3 million, compared with $10.0 million at December 31, 2011.
At June 30, 2012, total assets were $1.18 billion, net real estate investments were $1.08 billion and total debt was $652.7 million. Total equity was $434.0 million. The debt portfolio had a weighted-average interest rate of 4.66% and weighted-average maturity of 5.3 years. Considering hedges, 75% of debt was effectively fixed-rate and 25% variable-rate. The Company had approximately $43 million available for future borrowing under its unsecured facility and term loan capacity, and was in compliance with its debt covenants.
Same-property NOI increased 2.4% in the quarter and 3.9% year to date. The same-property portfolio was 92.7% leased at period-end, while the retail operating portfolio was approximately 93.0% leased.
Material changes versus the prior comparable period
- Quarterly revenue increased $0.8 million, or 3.1%; six-month revenue increased $3.0 million, or 6.3%, driven primarily by higher rental income from development properties, acquisitions, redevelopment activity and improved occupancy and rental rates.
- Quarterly operating income was essentially unchanged despite higher revenue. General and administrative expense increased 30% in the quarter, while depreciation and amortization increased 9.1%. Six-month depreciation and amortization increased 7.6%.
- Interest expense increased 16% to $6.4 million for the quarter and $12.9 million year to date, reflecting higher average debt and properties transitioning from construction to operations.
- Quarterly loss attributable to common shareholders worsened to $2.7 million, primarily because of higher interest expense, preferred dividends and a $3.1 million unfavorable change in derivative fair value included in comprehensive income. Year-to-date common loss improved by $0.5 million, largely because of a $5.2 million gain on the sale of Gateway Shopping Center.
- The Company issued 1.3 million Series A preferred shares for net proceeds of $31.3 million and issued approximately 184,000 common shares under equity distribution agreements for net proceeds of $0.8 million.
- The Company entered into a $125 million unsecured term loan maturing in 2019, amended and extended its unsecured revolving credit facility to 2016, and used proceeds to refinance or repay upcoming property-level maturities and reduce revolver borrowings.
- The Company acquired Cove Center in Stuart, Florida for $22.1 million and sold South Elgin Commons for $25 million. Gateway Shopping Center was sold in February 2012 for $29.4 million.
Guidance, outlook, commentary, risks and unusual items
- Management expected Delray Marketplace to open in the fourth quarter of 2012; it was 75.9% leased or committed at June 30, 2012. Rangeline Crossing was 87.5% leased or committed, with its first phase also scheduled for fourth-quarter 2012 opening.
- The Company had seven in-process development or redevelopment projects with estimated total costs of approximately $203 million, of which $100 million had been incurred. Approximately $103 million of additional costs were expected over the following twelve months.
- Management anticipated approximately $10 million to $11 million of additional major tenant improvements and renovation costs over the next twelve months.
- Approximately $11.1 million of property-level debt was scheduled to mature during the following twelve months, excluding scheduled principal payments. Management was pursuing repayment, refinancing or extensions.
- The Company recorded a $1.3 million litigation charge in the first quarter related to an arbitration award; the amount was paid in May 2012 and the matter was released.
- Accelerated depreciation of approximately $1.9 million year to date resulted from redevelopment plans at Four Corner Square and Rangeline Crossing.
- The Company expects $2.6 million of additional interest expense over the following twelve months as hedged forecasted interest payments occur. A 100-basis-point rate increase would have reduced fixed-rate debt fair value by approximately $16.1 million and increased annual cash flow costs on variable-rate debt by approximately $1.7 million.
- Material risks include tenant credit and bankruptcy risk, weak consumer spending and retail conditions, refinancing and liquidity risk, interest-rate volatility, property valuation and impairment risk, development and redevelopment execution, geographic concentration, environmental liabilities and maintaining REIT qualification.
- Contingencies include completion obligations, a guarantee related to a $30.3 million apartment construction loan at Eddy Street Commons, a maximum exposure of $1 million for certain South Bend development delay fees, $4.3 million of outstanding letters of credit and guarantees of joint-venture debt.
Investor verification points
- Verify the Company’s ability to refinance or extend the $11.1 million of debt maturing within twelve months and maintain access to approximately $43 million of available credit.
- Assess whether leasing progress and scheduled openings at Delray Marketplace, Rangeline Crossing, Holly Springs Towne Center and other projects support the stated development economics.
- Reconcile common-shareholder losses with FFO and adjusted FFO, including the effects of preferred dividends, noncontrolling interests, property sales, accelerated depreciation and litigation costs.
- Monitor tenant occupancy, rent collections, lease renewals, tenant bankruptcies and same-property NOI trends.
- Evaluate remaining development and redevelopment commitments, including the estimated $103 million of near-term project costs and the Company’s financing assumptions.
- Review interest-rate hedge valuations, future hedge-related interest expense and exposure to LIBOR and other variable-rate debt.
- Confirm the scope and enforceability of completion guarantees, joint-venture debt guarantees and other commitments disclosed in the filing.