Kite Realty Group Trust: First-Quarter 2018 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended March 31, 2018, for Kite Realty Group Trust and Kite Realty Group, L.P. The company owns, operates, acquires, develops, and redevelops neighborhood and community shopping centers in selected U.S. markets. At quarter-end, it owned interests in 115 operating and redevelopment properties totaling approximately 22.5 million square feet, plus two development projects under construction. The Parent Company owned approximately 97.6% of the Operating Partnership.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $89.8 million | $90.1 million | Down $0.3 million |
| Operating income | $(2.0) million | $8.1 million | Down $10.2 million |
| Net income attributable to common shareholders | $(17.9) million | $0.005 million | Down $17.9 million |
| Basic and diluted earnings per share | $(0.21) | $0.00 | Unfavorable change |
| Cash flow from operations | $36.3 million | $36.2 million | Essentially flat |
| FFO attributable to common shareholders | $42.5 million | $42.9 million | Down $0.4 million |
| Same-property NOI | $53.6 million | $52.8 million | Up 1.5% |
Revenue included $69.0 million of minimum rent, $18.4 million of tenant reimbursements, $1.1 million of other property-related revenue, and $1.4 million of fee income. Property operating expenses were 13.9% of total revenue, compared with 14.4% in the prior-year quarter. Leased percentage declined to 94.6% from 95.1%, while economic occupancy declined to 93.3% from 94.0%.
The quarter included a $24.1 million non-cash impairment charge, compared with $7.4 million in Q1 2017, and only $0.5 million of gains on property sales, compared with $8.9 million in the prior-year period. Excluding the impairment and other non-operating items, operating trends were supported by a 1.5% increase in same-property NOI and 2.3% blended rent growth on comparable new leases.
Balance Sheet, Debt, and Liquidity
- Total assets were $3.42 billion at March 31, 2018, including $3.19 billion of net investment properties.
- Mortgage and other indebtedness was $1.65 billion, compared with $1.70 billion at December 31, 2017.
- Debt had a weighted-average interest rate of 4.04% and weighted-average maturity of 5.3 years. Approximately 89% was fixed-rate or hedged and 11% was variable-rate.
- The company had $28.8 million of cash and cash equivalents and $38.5 million of cash, cash equivalents, and restricted cash.
- Availability under the unsecured revolving credit facility was $393.2 million, subject to borrowing-base and covenant requirements. The company was in compliance with applicable debt covenants.
- Net debt to annualized adjusted EBITDA was 6.76x under the company’s non-GAAP calculation.
- Cash dividends declared were $0.3175 per common share and Common Unit, up from $0.3025 in Q1 2017.
Material Changes Versus the Prior Comparable Period
- Total revenue was broadly stable, but other property-related revenue declined $1.5 million because of lower lease termination income. New fee income of $1.4 million partially offset that decline.
- Rental income declined $0.2 million. Property sales and anchor vacancies offset higher rental rates and small-shop occupancy.
- General and administrative expense increased 8.7% to $5.9 million, primarily because of higher personnel and overhead costs.
- Depreciation and amortization declined $7.3 million, primarily due to lower accelerated depreciation and amortization associated with redevelopment and tenant-specific assets.
- Two properties were sold for $63.0 million of gross proceeds and $61.6 million of net cash proceeds. The proceeds were primarily used to reduce debt.
- Operating cash flow remained essentially flat, while investing cash flow increased to $46.4 million from $1.3 million because of the property sales.
- Financing cash outflow increased to $76.3 million from $34.2 million, reflecting $101.4 million of debt repayments, distributions, and other financing uses.
Outlook, Commentary, Risks, and Unusual Items
Management stated that six projects in its 3-R redevelopment, repositioning, and repurposing initiative were under construction, with estimated aggregate costs of $61.5 million to $66.5 million and expected annualized returns of approximately 8% to 9%. Additional 3-R opportunities were estimated at $40 million to $56 million. The company expected to fund these activities primarily through operating cash flow and revolving-credit borrowings.
Management expected approximately $14 million to $16 million of additional major tenant improvements and renovation costs over the next 12 months. The two development projects under construction had approximately $11.3 million of remaining costs expected to be incurred over the following 12 to 18 months.
A joint-venture partner exercised a redemption right for approximately $22.0 million of Class B interests. The company was required to fund the cash redemption before November 8, 2018. The company also guaranteed certain joint-venture debt, including its $4.2 million share of an Embassy Suites construction loan balance.
After quarter-end, the revolving credit facility was amended to increase capacity from $500 million to $600 million and extend the scheduled maturity to April 2022, subject to extension options. The company also obtained favorable changes to certain leverage calculations and removed several term-loan covenants.
Key risks include tenant credit quality and bankruptcies, anchor vacancies, retail-sector and online-retail competition, interest-rate and refinancing risk, property impairments, geographic concentration, development and redevelopment execution, access to capital, REIT qualification, environmental and insurance risks, and cybersecurity or other business disruptions. Management reported no material litigation and effective disclosure controls.
Important Facts for Investors to Verify
- Reconcile the $24.1 million impairment charge to the affected property, valuation assumptions, and any potential for additional impairments.
- Assess whether declining occupancy, anchor vacancies, and tenant bankruptcies could offset rent growth and same-property NOI gains.
- Verify the funding plan and timing for the $22.0 million redemption obligation due before November 8, 2018.
- Review debt maturities, covenant headroom, variable-rate exposure, and the effect of the April 2018 credit-facility amendments.
- Evaluate whether the planned redevelopment, development, and tenant-improvement expenditures can be funded without materially increasing leverage.
- Review FFO, adjusted EBITDA, and net debt metrics as non-GAAP measures and compare the company’s definitions with those of peer REITs.
- Monitor the expected adoption effects of the new lease accounting standard, including the estimated $35 million to $40 million right-of-use asset.