Kite Realty Group Trust — Q2 2022 Form 10-Q Summary
Business context and reporting period
Kite Realty Group Trust is a REIT operating primarily through Kite Realty Group, L.P. The company owns, operates, acquires, develops and redevelops open-air shopping centers and mixed-use assets in selected U.S. markets. This report covers the three and six months ended June 30, 2022, and was filed August 5, 2022.
Following the October 2021 merger with Retail Properties of America, Inc. (RPAI), the company owned interests in 181 operating retail properties totaling approximately 28.8 million square feet, one office property totaling 0.3 million square feet and five development projects under construction. The merger added 100 operating retail properties and five development projects.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $202.6 million | $69.5 million | $397.0 million | $138.9 million |
| Net income attributable to common shareholders | $13.1 million | $(0.2) million | $(3.7) million | $24.3 million |
| Net income per common share | $0.06 | $0.00 | $(0.02) | $0.29 |
| Operating income | $39.0 million | $12.1 million | $48.0 million | $50.1 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $154.3 million | $67.4 million |
| FFO attributable to common shareholders | $108.1 million | $29.0 million | $208.6 million | $58.1 million |
| Adjusted FFO of the Operating Partnership | $108.4 million | $29.6 million | $210.0 million | $59.3 million |
| Same Property NOI | $132.1 million | $127.2 million | $261.3 million | $249.2 million |
Same Property NOI increased 3.8% in the second quarter and 4.9% for the six-month period. Same-property leased percentage was 93.8% at period end versus 92.2% in the prior-year comparison, while second-quarter economic occupancy was 91.2% versus 90.1%.
During the second quarter, the company executed 206 new and renewal leases covering 1.2 million square feet, with a 13.2% cash leasing spread on comparable leases. New leases generated a 49.1% cash leasing spread and renewal leases generated an 8.0% spread.
Balance sheet, debt and liquidity
| June 30, 2022 balance-sheet item | Amount |
|---|---|
| Total assets | $7.385 billion |
| Net investment properties | $6.618 billion |
| Mortgage and other indebtedness, net | $3.001 billion |
| Cash and cash equivalents | $90.8 million |
| Cash, cash equivalents and restricted cash | $99.2 million |
| Total equity | $3.896 billion |
- Debt consisted of $1.925 billion of senior unsecured notes, $720.0 million of unsecured term loans and $311.8 million of mortgage debt. The revolving credit facility had no drawn balance.
- After giving effect to interest-rate swaps, 94% of debt was fixed-rate and 6% was variable-rate. The weighted average interest rate was 4.09%, with 4.2 years of weighted average maturity.
- As of June 30, 2022, borrowing capacity under the revolving facility was approximately $848.5 million. Management stated that all applicable debt covenants were satisfied and that liquidity was adequate for the next 12 months and beyond.
- Company-share net debt to annualized adjusted EBITDA was 5.3x, based on second-quarter adjusted EBITDA of $135.3 million and annualized adjusted EBITDA of $541.1 million.
Material changes versus the prior comparable period
- Revenue increased 191.4% in the second quarter and 185.7% for the six-month period, primarily because the RPAI portfolio contributed $126.7 million and $250.3 million of rental income, respectively.
- Six-month net income attributable to common shareholders declined to a loss of $3.7 million from income of $24.3 million. The decline reflected substantially higher depreciation and amortization and interest expense following the merger.
- Second-quarter net income attributable to common shareholders improved to $13.1 million from a loss of $0.2 million, aided by a $24.0 million gain on property sales.
- Six-month depreciation and amortization rose to $241.3 million from $60.4 million, and interest expense increased to $51.2 million from $24.5 million, largely due to the RPAI assets and debt assumed in the merger.
- Operating cash flow increased to $154.3 million from $67.4 million. Financing activities used $224.2 million, primarily reflecting debt repayments and $86.6 million of distributions to common shareholders and common unitholders.
- The company acquired Pebble Marketplace and MacArthur Crossing for an aggregate purchase price of $66.0 million and sold Plaza Del Lago and a portion of Hamilton Crossing Centre for net proceeds of $65.4 million.
Outlook, commentary, risks and unusual items
- Management expects to fund near-term requirements through operating cash flow, cash on hand and the revolving facility. Secured debt maturities before June 30, 2023 totaled $237.6 million, excluding scheduled principal payments.
- The company anticipated approximately $100 million of additional major tenant-improvement costs over the next 12 to 18 months for executed leases covering currently vacant space.
- The five development projects under construction had estimated total costs of $159.8 million, of which the company’s share was estimated at $95.9 million. The company had incurred $15.8 million as of June 30, 2022.
- Subsequent to quarter-end, the revolving facility was increased by $250 million to $1.1 billion, and the Operating Partnership issued a seven-year $300 million term loan. Proceeds repaid a $200 million term loan scheduled to mature in 2023 and funded general corporate purposes.
- Subsequent to quarter-end, the company acquired Palms Plaza for $35.8 million and repaid two mortgages totaling $44.9 million.
- Management highlighted risks from COVID-19, inflation, rising interest rates, refinancing, tenant financial condition, real estate market conditions, merger integration, geographic concentration, development and acquisition activity, property impairment, cybersecurity, climate and severe weather events, and maintaining REIT qualification.
- The company reported no material litigation and no material changes to the risk factors disclosed in its 2021 Form 10-K. Disclosure controls and internal control over financial reporting were reported effective.
- The Board declared a second-quarter distribution of $0.21 per common share and Common Unit, paid July 15, 2022. The share repurchase authorization was increased to $300 million, but no purchases had been made under the program as of June 30, 2022.
Important facts for investors to verify
- Assess the sustainability of FFO and Same Property NOI growth after separating the effects of the RPAI merger, acquisitions, dispositions and nonrecurring items.
- Review the company’s ability to refinance or repay the $517.6 million of debt scheduled to mature in 2023 and the $272.4 million scheduled to mature in 2024.
- Monitor variable-rate debt exposure, the transition from LIBOR to SOFR and the effect of higher interest rates on interest expense and cash flow.
- Verify leasing, occupancy and tenant-improvement assumptions, including the anticipated $100 million of additional tenant-improvement costs.
- Evaluate funding requirements and execution risk for the five development projects and other redevelopment commitments.
- Reconcile non-GAAP measures, including FFO, Adjusted FFO, NOI and Adjusted EBITDA, to GAAP results and compare definitions with other REITs.
- Consider the continuing effects of inflation, economic conditions, tenant credit quality and any resurgence or lasting behavioral effects from COVID-19.