Kite Realty Group Trust — Form 10-Q Summary
Business Context and Reporting Period
This combined Form 10-Q covers Kite Realty Group Trust and Kite Realty Group, L.P. for the quarter and nine months ended September 30, 2021. Kite owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in selected U.S. markets. At quarter-end, the portfolio included 87 operating properties totaling approximately 16.8 million square feet and six development or redevelopment projects.
The Parent Company owned approximately 97.2% of the Operating Partnership. On October 22, 2021, after the reporting period, Kite completed its approximately $4.7 billion stock-for-stock merger with Retail Properties of America, Inc. (RPAI), including the assumption of approximately $1.9 billion of debt.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $71.5 million | $65.1 million | $210.4 million | $198.3 million |
| Operating income | $6.0 million | $8.2 million | $56.1 million | $29.4 million |
| Net income (loss) | $(6.8) million | $(4.6) million | $18.4 million | $(9.3) million |
| Net income (loss) attributable to common shareholders | $(7.0) million | $(4.6) million | $17.4 million | $(9.4) million |
| FFO attributable to common shareholders | $21.8 million | $25.7 million | $79.9 million | $81.1 million |
| Adjusted FFO of the Operating Partnership | $29.5 million | $26.3 million | $88.8 million | $83.3 million |
| Cash flow from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $103.8 million | $85.8 million |
Q3 operating margin was approximately 8.4%, compared with 12.5% in the prior-year quarter. The nine-month operating margin was approximately 26.7%, compared with 14.8% in the prior-year period. Q3 net loss margin was approximately 9.7%; the nine-month net margin was approximately 8.8%.
- Q3 rental income increased 9.2% to $70.2 million, primarily reflecting improved collections and lower bad-debt expense.
- Same-property NOI increased 10.8% in Q3 and 5.7% for the nine-month period. Economic occupancy was 89.3% in Q3 versus 92.0% in the prior-year quarter; leased occupancy was 92.8% versus 93.3%.
- Q3 net loss included $9.2 million of merger and acquisition costs. Nine-month merger costs totaled $10.0 million; management estimated total merger-related costs at approximately $105 million.
- Nine-month net income benefited from $27.5 million of gains on property sales, including the sale of 17 ground leases for gross proceeds of approximately $42 million.
- During Q3, the Company executed 82 new and renewal leases covering approximately 584,800 square feet. Comparable cash rent spread was 13.4% and comparable GAAP rent spread was 20.7%.
Balance Sheet, Debt and Liquidity
- Total assets were $2.71 billion at September 30, 2021, including $2.31 billion of net investment properties.
- Mortgage and other indebtedness was $1.289 billion, compared with $1.171 billion at December 31, 2020. Approximately 86% was fixed-rate or economically fixed-rate debt, with a weighted-average interest rate of 3.74% and weighted-average maturity of 4.3 years.
- The Company had $99.5 million of cash and cash equivalents, $4.3 million of restricted cash and $125.0 million in short-term deposits. Management reported approximately $224.5 million of cash, cash equivalents and short-term deposits.
- The $600 million unsecured revolving credit facility had no borrowings and approximately $416.1 million of remaining availability based on the unencumbered asset pool. Another debt disclosure states $416.7 million of availability; the filing does not reconcile the difference.
- Debt maturities included $108.1 million of secured debt due before September 30, 2022, $154.5 million due in 2022 and $257.3 million due in 2023.
- In March 2021, the Operating Partnership issued $175.0 million of 0.75% exchangeable senior notes due April 2027. Net proceeds were approximately $169.7 million, and $9.8 million was spent on capped calls intended to reduce potential dilution.
- The Company was in compliance with its debt covenants at September 30, 2021 and reported more than $600 million of liquidity, including cash, short-term deposits and revolving-credit availability.
Cash Flow and Capital Uses
- Operating cash flow increased to $103.8 million from $85.8 million, aided by improved rent collections and recovery of previously deferred rent.
- Investing cash flow was negative $109.1 million, primarily due to $125.0 million invested in short-term deposits and $36.9 million of capital expenditures, partly offset by land and property-sale proceeds.
- Financing cash flow was positive $62.4 million, including $175.0 million of loan proceeds, partially offset by $52.1 million of debt repayments, $44.2 million of distributions to common shareholders and Common Unit holders, and exchangeable-note issuance costs and capped-call payments.
- Management expected approximately $18 million to $24 million of additional major tenant-improvement costs over the following 12 months. Remaining estimated costs for five development and redevelopment projects were approximately $14.4 million.
Material Changes, Outlook and Risks
- The RPAI merger was the principal subsequent event. It added 102 operating properties and entitled land parcels, issued approximately $2.8 billion of Kite shares and assumed approximately $1.9 billion of debt. The filing cautions that integration costs, execution risk, potential disruption and failure to achieve expected synergies could affect results.
- No formal earnings or FFO guidance is provided in the filing. Management emphasized liquidity, debt-maturity management, selective leasing and continued caution regarding redevelopment spending.
- Substantially all tenants had reopened by September 30, 2021, and approximately 98% of rent billings for the three months ended September 30 had been collected as of November 6, 2021. However, COVID-19 resurgences, variants, tenant financial distress, vacancies and changes in consumer behavior remained significant uncertainties.
- Seven putative shareholder lawsuits challenged merger-related disclosures. Kite stated that the claims were without merit and intended to defend them vigorously; the filing does not provide a quantified loss estimate.
- The Company had $1.2 million of outstanding letters of credit with no amounts advanced and provided certain development, construction and joint-venture guarantees, including a capped repayment guaranty related to an Embassy Suites construction loan.
- Interest-rate exposure remained material: a 100-basis-point change in rates on unhedged variable-rate debt was estimated to change annual cash flow by approximately $1.8 million. Interest-rate derivatives had a net liability fair value of approximately $24.2 million at quarter-end.
Investor Verification Checklist
- Verify the post-merger pro forma debt, leverage, interest expense and liquidity position, including the reported approximately $3.1 billion of debt after the merger.
- Reconcile revolving-credit availability reported as $416.1 million in the liquidity discussion versus $416.7 million elsewhere.
- Assess whether tenant collections, occupancy and same-property NOI remained resilient after the merger and as COVID-19 effects evolved.
- Track actual merger and integration costs against the approximately $105 million estimate and evaluate realization of expected synergies.
- Review 2022 and 2023 debt maturities, refinancing capacity and the effect of interest-rate changes.
- Monitor the shareholder litigation, merger-related contingencies, REIT qualification and the Company’s ability to maintain distributions while funding capital requirements.