Kite Realty Group Trust — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2022, filed November 4, 2022. Kite Realty Group Trust operates as a REIT through Kite Realty Group, L.P., owning, operating, acquiring, developing, and redeveloping open-air shopping centers and mixed-use assets in the United States.
At September 30, 2022, the Company owned interests in 183 operating retail properties totaling approximately 28.9 million square feet, one office property totaling approximately 0.3 million square feet, and four development projects under construction. Comparisons with 2021 are significantly affected by the October 2021 merger with Retail Properties of America, Inc. (RPAI), which added 100 operating retail properties and five development projects.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 |
|---|---|---|---|---|
| Total revenue | $200.3 million | $71.5 million | $597.3 million | $210.4 million |
| Operating income | $18.3 million | $6.0 million | $66.4 million | $56.1 million |
| Net income (loss) | $(7.7) million | $(6.8) million | $(11.1) million | $18.4 million |
| Net income (loss) attributable to common shareholders | $(7.8) million | $(7.0) million | $(11.5) million | $17.4 million |
| FFO attributable to common shareholders | $106.8 million | $21.8 million | $315.5 million | $79.9 million |
| Adjusted FFO of Operating Partnership | $107.7 million | $29.5 million | $317.7 million | $88.8 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $262.4 million | $103.8 million |
Q3 operating income was approximately 9.1% of revenue, compared with approximately 8.4% in the prior-year quarter. For the nine-month period, operating income was approximately 11.1% of revenue versus approximately 26.7% in 2021, reflecting substantially higher depreciation and amortization following the RPAI merger.
- Same Property NOI increased 4.4% in Q3 and 4.7% for the nine-month period. Same-property leased percentage rose to 94.1% from 93.0%, while Q3 economic occupancy increased to 91.2% from 90.1%.
- During Q3, the Company executed 221 new and renewal leases totaling approximately 1.57 million square feet. The cash leasing spread was 10.8% overall, 30.7% for comparable new leases, and 8.5% for comparable renewals.
- Net investment properties totaled $6.62 billion at September 30, 2022, compared with $6.71 billion at December 31, 2021. Total assets were $7.40 billion.
- Total equity was $3.88 billion, compared with $3.93 billion at year-end 2021. Accumulated deficit increased to $1.11 billion.
Debt, Liquidity, and Cash Flow
- Mortgage and other indebtedness, net, was $3.01 billion at September 30, 2022, compared with $3.15 billion at December 31, 2021.
- Debt had a 4.15% weighted-average interest rate and 4.5-year weighted-average maturity. Approximately 94% was fixed-rate or hedged debt and 6% was variable-rate debt.
- The Company had $88.4 million of cash and cash equivalents, $8.1 million of restricted cash and escrow deposits, and approximately $1.1 billion of availability under its unsecured revolving facility.
- The revolving facility was increased to $1.1 billion in July 2022. The Company also obtained a $300 million unsecured term loan, using proceeds to repay a $200 million term loan, certain secured loans, and for general corporate purposes.
- No revolving borrowings were outstanding at September 30, 2022. The Company reported compliance with applicable debt covenants and had $1.5 million of outstanding letters of credit with no amounts drawn.
- Cash provided by operating activities was $262.4 million. Investing activities used $13.7 million, including $100.1 million for acquisitions and $106.5 million of capital expenditures. Financing activities used $252.6 million, including $131.4 million of distributions to common shareholders and unitholders.
- Debt maturities before September 30, 2023 included approximately $189.3 million of secured debt and $95.0 million of unsecured debt, excluding scheduled principal amortization.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $128.8 million, or 180.3%, in Q3 and by $386.9 million, or 183.9%, for the nine-month period, primarily because the RPAI portfolio was included for the full reporting period in 2022.
- Rental income increased by $125.5 million in Q3 and $376.7 million for the nine-month period; RPAI properties contributed $122.9 million and $370.2 million, respectively, of the increases.
- Depreciation and amortization increased by $85.6 million in Q3 and $266.5 million for the nine-month period, primarily due to purchase accounting from the RPAI merger.
- Interest expense increased by $13.3 million in Q3 and $40.1 million for the nine-month period, primarily due to debt assumed in the merger and higher borrowing costs.
- Merger and acquisition costs declined to $0.1 million in Q3 from $9.2 million and to $1.0 million for the nine-month period from $10.0 million.
- The Company acquired three properties during the nine months for a total purchase price of approximately $101.8 million and sold Plaza Del Lago and part of Hamilton Crossing Centre for net proceeds of $65.4 million.
Outlook, Commentary, Risks, and Unusual Items
Management stated that it expects adequate liquidity over the next 12 months and beyond. The Company anticipated approximately $100 million of additional major tenant-improvement costs over the following 12 to 18 months and estimated total costs of $112.7 million for four development projects, of which its share was estimated at $80.8 million. No formal earnings or operating guidance was provided in the filing.
- Inflation and Federal Reserve rate increases have raised borrowing costs. Management uses interest-rate derivatives to reduce exposure, but remains unable to predict the ultimate effect of future rate increases.
- Management identified risks from economic slowdown or recession, tenant financial weakness, reduced consumer spending, vacancy, real estate market conditions, refinancing requirements, interest-rate volatility, and property concentration in certain states.
- COVID-19 resurgences, variants, and changing consumer behavior could adversely affect tenants, rent collections, occupancy, revenue, net income, and FFO.
- The Company remains exposed to integration and synergy risks from the RPAI merger, development and redevelopment risks, property valuation and impairment risks, environmental and weather-related risks, cybersecurity risks, and the ability to maintain REIT status.
- Subsequent to quarter-end, the Company redeemed remaining Class B units for $9.7 million, sold a ground lease for $10.0 million, and terminated $150 million of forward-starting interest-rate swaps, receiving $30.9 million.
- The Company declared a third-quarter distribution of $0.22 per common share and Common Unit, paid October 14, 2022. The filing also reports no repurchases under the $300 million share repurchase authorization and no sales under the $150 million ATM program.
- The Company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Separate the effects of the RPAI merger from underlying same-property performance when evaluating revenue, expenses, occupancy, NOI, and FFO trends.
- Review the $189.3 million of secured debt and $95.0 million of unsecured debt maturing in 2023, along with refinancing costs in the higher-rate environment.
- Assess whether operating cash flow and the $1.1 billion revolving facility can fund planned tenant improvements, development spending, distributions, and debt obligations.
- Reconcile GAAP net losses with FFO and adjusted FFO, particularly the effects of depreciation, merger costs, property gains, prior-period collections, and noncontrolling interests.
- Monitor tenant collections, occupancy, leasing spreads, bad-debt expense, and the approximately $100 million of anticipated major tenant-improvement spending.
- Confirm the effect of subsequent swap termination proceeds and the $9.7 million Class B unit redemption in later-period financial statements.