KRG

Business Context and Reporting Period

Company: Kite Realty Group Trust (KRG)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: KRG is a vertically integrated real estate investment trust (REIT) engaged in the ownership, operation, management, leasing, acquisition, construction, and development of neighborhood and community shopping centers and commercial properties. As of December 31, 2006, the Company owned interests in 49 retail operating properties (approx. 7.6 million sq. ft. GLA) and 4 commercial operating properties (approx. 563,000 sq. ft. NRA). The portfolio was 93.4% leased for retail and 91.7% leased for commercial properties.

Key Financial Metrics

Distributions: The Company declared total cash distributions of $0.765 per common share for 2006 (up from $0.75 in 2005). Approximately 45% of 2006 distributions were classified as a return of capital.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 33% to $131.9 million, driven by a 25% increase in rental income and a 57% increase in construction and service fee revenue. Growth was primarily due to acquisitions and the transition of development properties to operational status.
• Net Income Decline: Net income decreased 24% to $10.2 million. This decline was primarily due to the absence of a $6.3 million gain from discontinued operations (sale of Mid-America Clinical Labs) recorded in 2005, partially offset by higher operating income.
• Debt Expansion: Total indebtedness increased 51% to $567 million to fund acquisitions and development. Approximately $170.7 million of debt was at variable rates (net of hedges).
• Acquisitions: In 2006, the Company acquired three operating properties and one property under construction (Kedron Village) for a total cost of $92.8 million.
• Development Pipeline: The Company had 11 retail development properties in progress with a total estimated cost of $201.1 million, of which $119.1 million had been incurred by year-end.

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to continue pursuing targeted development and acquisitions. A significant strategic move was the formation of a joint venture with Prudential Real Estate Investors (PREI) in September 2006 to pursue up to $1.25 billion in community shopping center opportunities. The Company expects to generate fee income and performance-based incentives from this venture.

Liquidity: As of December 31, 2006, the Company had $24 million in cash and $21.7 million available under its secured revolving credit facility. In February 2007 (subsequent event), the Company entered into a new $200 million unsecured revolving credit facility.

Key Risks:

• Concentration Risk: Approximately 40% of owned square footage and 38% of annualized base rent is located in Indiana; 23% and 21% respectively in Florida; and 20% and 21% in Texas.
• Interest Rate Risk: A significant portion of debt is variable rate. A 100 basis point increase in interest rates would decrease annual cash flow by approximately $1.7 million.
• Tenant Concentration: No single tenant accounted for more than 3.7% of total annualized base rent. Top tenants include Lowe's, Circuit City, and Publix.
• REIT Status: Failure to qualify as a REIT would subject the Company to corporate income tax and restrict distributions.
• Redevelopment: The Company is pursuing a $15 million net investment redevelopment of Glendale Mall in Indianapolis, which involves demolition and tenant buyouts.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that $161.9 million was due in 2007 (including the revolving line of credit), requiring refinancing or repayment.
• Variable Rate Exposure: Confirm the current status of interest rate swaps and the impact of rising LIBOR rates on the $170.7 million of variable rate debt.
• Development Pipeline Costs: Review the remaining capital requirements for the $201.1 million development pipeline and the $244 million "visible shadow" pipeline.
• Joint Venture Terms: Examine the specific terms of the Prudential Real Estate Investors (PREI) joint venture, particularly the equity contribution structure (80% PREI / 20% KRG) and fee income potential.
• Glendale Mall Redevelopment: Monitor the progress and cost overruns associated with the Glendale Mall redevelopment project.
• Tenant Bankruptcy: Assess the financial health of major tenants, particularly Circuit City, which accounted for 2.8% of annualized base rent.