Kite Realty Group Trust — 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013. Kite Realty Group Trust is a Maryland REIT that owns, operates, leases, acquires, develops and redevelops neighborhood and community shopping centers, primarily through Kite Realty Group, L.P. At year-end, the company reported 66 retail operating properties totaling approximately 11.5 million square feet of total GLA, two commercial operating properties totaling approximately 0.4 million square feet, development and redevelopment projects, and 131 acres of land held for future development.
The retail portfolio was 95.3% leased at December 31, 2013, compared with 94.2% at December 31, 2012. No individual retail tenant represented more than 4.7% of annualized base rent; the largest tenants were Publix, TJX Companies, Bed Bath & Beyond, Dick’s Sporting Goods and PetSmart.
Financial performance, cash flow and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $129.5 million | $96.5 million | +$32.9 million |
| Operating income | $27.6 million | $19.6 million | +$8.0 million |
| Operating margin | 21.3% | 20.3% | Improved |
| Net loss attributable to common shareholders | $(11.3) million | $(12.3) million | Loss narrowed |
| Net loss per common share | $(0.12) | $(0.18) | Improved |
| Funds from operations allocable to the company | $44.4 million | $27.5 million | +$17.0 million |
| Cash flow from operating activities | $52.1 million | $23.3 million | +$28.8 million |
| Cash and cash equivalents | $18.1 million | $12.5 million | +$5.7 million |
| Consolidated indebtedness | $857.1 million | $699.9 million | +$157.2 million |
Revenue growth reflected acquisitions, recently operational development properties, redevelopment activity and higher occupancy. Same-property NOI increased 4.9% to $60.8 million, while same-property leased and occupied percentages increased to 96.1% and 92.4%, respectively. Leasing spreads on space vacant less than one year were positive 14.6% for 2013.
Cash used in investing activities was $514.9 million, including $407.2 million for property acquisitions and $112.6 million of capital expenditures. Cash provided by financing activities was $468.5 million, principally from common equity offerings and debt borrowings. The company ended the year with approximately $69 million of liquidity, consisting of $18 million of cash and approximately $51 million of availability under its unsecured revolving credit facility. Five additional unencumbered assets could potentially provide approximately $135 million of borrowing capacity, subject to applicable conditions.
Debt was composed of approximately $603.4 million of fixed-rate debt, including the effects of hedges, and $253.7 million of variable-rate debt. Interest-rate hedges covered approximately $326.8 million of debt. Management estimated that a 100-basis-point increase in rates on variable-rate debt would reduce annual cash flow by approximately $2.5 million.
The company declared common distributions of $0.24 per share and Series A preferred distributions of $2.0625 per share in 2013. Approximately 81% of common distributions for the year were characterized as return of capital.
Material changes versus the prior comparable period
- Completed 13 property acquisitions, including a nine-property portfolio acquired for approximately $304 million and three additional shopping centers acquired for aggregate consideration of approximately $64.1 million.
- Issued 52.325 million common shares in two offerings for net proceeds of approximately $314 million, materially increasing common shares outstanding from 77.7 million to 130.8 million.
- Increased the unsecured term loan from $125 million to $230 million and reduced applicable borrowing spreads. The unsecured revolving facility was amended with a maturity extension and lower pricing.
- Completed or substantially completed Delray Marketplace, Holly Springs Towne Center Phase I, Four Corner Square and Rangeline Crossing. Parkside Town Commons Phases I and II commenced construction.
- Revenue increased 34.1%, while depreciation and amortization increased 40.3% and interest expense increased 19.7%, reflecting the larger portfolio and assets placed in service.
- FFO allocable to the company increased 61.8%, although GAAP net loss attributable to common shareholders remained $11.3 million.
- The company recorded a $5.4 million impairment charge and a $1.2 million gain on debt extinguishment associated with the Kedron Village foreclosure. Kedron Village was transferred to the lender in satisfaction of its non-recourse debt.
Outlook, commentary, risks and unusual items
Management stated that it intended to continue improving leverage and other financial ratios, actively manage the operating portfolio and development pipeline, and fund growth through operating cash flow, debt, equity offerings, property dispositions and potential joint ventures. No formal quantitative earnings or FFO guidance is provided in the filing.
Expected 2014 activity included transitioning Delray Marketplace, Bolton Plaza and King’s Lake Square into or further toward the operating portfolio, and opening Parkside Town Commons Phase I. Development and redevelopment projects under construction had estimated remaining costs of approximately $61 million at year-end. The company anticipated approximately $1.3 million of recurring capital expenditures and $11 million to $13 million of major tenant improvements and renovation costs during the following twelve months.
Approximately $86 million of debt was scheduled to mature in 2014, excluding scheduled monthly principal payments, and approximately $96 million in 2015. Management expected to refinance, repay or extend these maturities but stated that it could not provide assurance that financing would be available on satisfactory terms.
On February 9, 2014, the company announced a proposed stock-for-stock merger with Inland Diversified Real Estate Trust, Inc., valued at approximately $2.1 billion, including assumed debt of approximately $0.9 billion. The transaction would add 57 retail properties and is expected to close in late second quarter or third quarter of 2014, subject to shareholder approval and other conditions. The filing warns of substantial integration costs, shareholder dilution, increased leverage, execution risk and risks associated with selling acquired multifamily assets.
Principal risks include tenant bankruptcies and rent collection, retail-sector weakness and e-commerce, geographic concentration in Indiana, Florida and Texas, refinancing and interest-rate risk, development cost overruns and lease-up risk, impairment of real estate assets, restrictive debt covenants, environmental and insurance exposures, REIT qualification requirements, and merger-related execution and financing risks. The filing states that the company was in compliance with applicable covenants at December 31, 2013 and that no material litigation was pending.
Most important facts for investors to verify
- Progress, approval status, closing conditions, final exchange ratio and financing impact of the Inland Diversified merger.
- Refinancing or repayment plans for the $86 million of 2014 maturities and subsequent 2015 maturities.
- Actual occupancy, rental-rate growth, tenant retention and exposure to the Courthouse Shadows Publix vacancy scheduled for May 2014.
- Completion costs, leasing levels and stabilized returns for Parkside Town Commons, Delray Marketplace and redevelopment projects.
- Post-offering share count, dilution, preferred distribution obligations and the sustainability of common distributions relative to FFO and cash flow.
- Variable-rate debt exposure, hedge maturities and the effect of higher interest rates on cash flow.
- Whether future property impairments, tenant defaults, environmental liabilities or additional non-core asset sales could materially affect results.