Kite Realty Group Trust — FY2018 Form 10-K Summary
Business Context and Reporting Period
The filing combines the annual reports of Kite Realty Group Trust and Kite Realty Group, L.P. for the fiscal year ended December 31, 2018. Kite is a REIT that owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in the United States. The Parent Company owned approximately 97.6% of the Operating Partnership at year-end.
As of December 31, 2018, the Company owned interests in 111 operating and redevelopment properties totaling approximately 21.9 million square feet, plus one development project under construction. The retail operating portfolio was 94.6% leased, with no individual tenant representing more than 2.6% of annualized base rent.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $354.2 million | $358.8 million | Down $4.6 million |
| Operating income | $21.0 million | $79.9 million | Down $58.9 million |
| Net loss attributable to common shareholders | $46.6 million | Net income of $11.9 million | Decline of $58.4 million |
| Basic and diluted loss per share | $0.56 | Income of $0.14 | Unfavorable change |
| Same Property NOI | $218.7 million | $215.7 million | Up 1.4% |
| FFO attributable to common shareholders | $167.1 million | $170.8 million | Down $3.7 million |
| Cash provided by operating activities | $154.4 million | $154.6 million | Down $0.2 million |
| Cash and cash equivalents | $35.4 million | $24.1 million | Up $11.3 million |
| Total debt, net | $1.543 billion | $1.699 billion | Down $155.9 million |
| Distributions declared per share | $1.270 | $1.225 | Up 3.7% |
The 2018 net loss included $70.4 million of impairment charges, compared with $7.4 million in 2017. Depreciation and amortization was $152.2 million, and interest expense was $66.8 million. The filing does not present a consolidated GAAP profit margin; reported operating income represented approximately 5.9% of revenue, versus approximately 22.3% in 2017.
Fourth-quarter 2018 revenue was $86.9 million and net loss attributable to common shareholders was $31.2 million, or $0.37 per share. Fourth-quarter results included a $31.5 million impairment charge and a $4.7 million loss on property sales.
Operating Performance and Material Changes
- Same Property NOI increased 1.4%, primarily from higher rental rates and contractual rent increases.
- The Company executed 315 new and renewal leases covering approximately 1.7 million square feet at a blended cash rent spread of 6.8%. New leases achieved a 12.3% spread and renewals achieved a 5.4% spread.
- Small-shop leased occupancy reached a company record of 91.2%, while annualized base rent per square foot increased 3.2% to $16.84.
- Revenue declined 1.3%, principally because property dispositions reduced rental income by $13.1 million. Increases from completed development and redevelopment projects partially offset the disposition impact.
- Property operating expenses increased 1.4%, and the property operating expense ratio rose to 14.2% from 13.8%, partly because of anchor vacancies and lower expense recoveries.
- Six non-core operating properties were sold for approximately $122.2 million of gross proceeds. The proceeds, together with proceeds from a strategic joint venture, were used primarily to repay debt.
- The Company sold an 80% interest in three core assets to a TH Real Estate joint venture for approximately $89.0 million of net proceeds and retained a 20% interest.
- One development and six redevelopment projects were completed at total costs of approximately $79.9 million and an aggregate return on cost of 8.5%.
- Capital expenditures totaled $59.3 million, including development, redevelopment, tenant improvement and recurring property expenditures.
Debt, Liquidity and Cash Flow
- Net consolidated debt was $1.543 billion at year-end, with approximately 95% fixed-rate or hedged and a weighted-average interest rate of 4.13%.
- The weighted-average scheduled debt maturity was 5.8 years. The Company reported approximately $20.7 million of term debt maturities through December 31, 2020, excluding scheduled principal amortization.
- In October 2018, the Company issued a $250 million unsecured term loan maturing in 2025, extending and laddering the debt maturity profile.
- Approximately $449.5 million was available under the unsecured revolving credit facility, subject to borrowing-base limitations; combined cash and available revolver capacity was approximately $485 million.
- The debt service coverage ratio was 3.3x, and management reported compliance with applicable debt covenants at December 31, 2018.
- Cash provided by operations was $154.4 million. Investing activities provided $148.3 million, primarily from property sales, while financing activities used $289.4 million, primarily for debt repayment, distributions and joint-venture interest redemptions.
- The Company had $391.2 million of interest-rate hedges. A 100-basis-point increase in rates on unhedged variable-rate debt would reduce annual cash flow by approximately $0.7 million.
Outlook, Commentary, Risks and Unusual Items
In February 2019, management announced plans to market and sell up to $500 million of non-core assets to improve portfolio quality, reduce leverage and concentrate on markets where the Company believes it can achieve scale and attractive risk-adjusted returns. Management expects most net proceeds to repay debt, but completion and pricing of the sales are not assured.
The Company expects approximately $14 million to $16 million of additional major tenant improvements and $25 million to $35 million to release vacant anchor space. Eddy Street Commons Phase II has estimated total project costs of $90.8 million, including a projected Company share of $10.0 million, and is targeted for stabilization in late 2020. The Company has provided a completion guaranty covering the entire project.
Key risks include tenant bankruptcies and closures, e-commerce competition, retail-sector weakness, geographic concentration in Florida, Indiana and Texas, property impairment, refinancing and interest-rate risk, LIBOR transition risk, joint-venture dependencies, development cost overruns, environmental and insurance exposures, cybersecurity incidents and maintenance of REIT qualification. Approximately 5.8% of annualized base rent was scheduled to expire in 2019.
The Company recorded $70.4 million of impairment charges in 2018, including $31.5 million in the fourth quarter, largely due to shortened expected holding periods and a decision not to proceed with certain land development. The Company also classified Whitehall Pike as held for sale at year-end. No material litigation was reported.
Management estimated that adoption of the new lease standard in 2019 would result in recognition of a right-of-use asset of approximately $27 million to $32 million and could reduce capitalized leasing costs, increase general and administrative expense and reduce amortization expense by approximately $4 million to $5.5 million, subject to actual leasing activity.
Investor Verification Checklist
- Verify the sustainability of operating cash flow, FFO and the $1.27 per-share annual distribution, particularly given the 2018 GAAP net loss.
- Assess whether the planned disposition of up to $500 million of non-core assets is completed at expected valuations and how much debt is repaid.
- Review impairment assumptions, including projected rents, capitalization rates, holding periods and the properties affected by the $70.4 million charge.
- Monitor anchor tenant bankruptcies, vacant anchor space, 2019 lease expirations and the ability to maintain occupancy and leasing spreads.
- Confirm debt maturity execution, covenant compliance, revolver availability and exposure to LIBOR replacement and higher interest rates.
- Evaluate funding requirements and completion guarantees for Eddy Street Commons Phase II and other redevelopment projects.
- Reconcile non-GAAP measures such as NOI and FFO with GAAP results and compare the Company’s definitions with those used by peer REITs.
- Confirm continued REIT qualification and the tax characterization of distributions; approximately 44% of 2018 distributions were reported as return of capital.