Kite Realty Group Trust — Q1 2022 Form 10-Q Summary
Business context and reporting period
Kite Realty Group Trust is a publicly traded REIT operating through Kite Realty Group, L.P. The Company owns, operates, acquires, develops and redevelops open-air shopping centers and mixed-use assets in selected U.S. markets. This unaudited filing covers the three months ended March 31, 2022, with comparison to the three months ended March 31, 2021.
Results are substantially affected by the October 2021 merger with Retail Properties of America, Inc. (“RPAI”). The merger added 100 operating retail properties, five development projects and approximately $1.8 billion of assumed debt. As of March 31, 2022, the Company owned interests in 181 operating retail properties totaling approximately 28.8 million square feet, one office property totaling 0.3 million square feet and seven development projects under construction.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $194.4 million | $69.4 million | +$125.0 million |
| Rental income | $189.9 million | $67.9 million | +$122.0 million |
| Operating income | $9.0 million | $38.0 million | -$29.0 million |
| Net income (loss) | $(16.8) million | $25.4 million | -$42.2 million |
| Net income (loss) per share | $(0.08) | $0.29 | -$0.37 |
| Cash flow from operations | $49.6 million | $31.3 million | +$18.3 million |
| FFO attributable to common shareholders | $100.6 million | $29.1 million | +$71.5 million |
| Adjusted FFO of the Operating Partnership | $101.5 million | $29.8 million | +$71.8 million |
| Dividends declared per common share | $0.19 | $0.15 | +$0.04 |
Approximate GAAP margins were 4.6% for operating income and negative 8.7% for net income in Q1 2022, compared with 54.8% and 36.6%, respectively, in Q1 2021. The decline reflects substantially higher depreciation and amortization, interest expense and merger-related costs following the RPAI transaction, as well as the prior-year gain from selling ground leases.
- Same-property NOI increased 5.9% to $129.5 million. Leased percentage increased to 93.6% from 91.3%, while economic occupancy increased to 90.4% from 89.7%.
- The Company executed 182 new and renewal leases totaling approximately 1.05 million square feet, with a 16.1% cash leasing spread on comparable leases. New leases generated a 58.7% spread and renewals generated an 8.9% spread.
- Adjusted EBITDA was $128.6 million, and annualized adjusted EBITDA was $514.4 million. Reported net debt to annualized adjusted EBITDA was 5.7x.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2022 | December 31, 2021 |
|---|---|---|
| Total assets | $7.57 billion | $7.64 billion |
| Net investment properties | $6.68 billion | $6.71 billion |
| Mortgage and other indebtedness, net | $3.18 billion | $3.15 billion |
| Cash and cash equivalents | $74.3 million | $93.2 million |
| Total equity | $3.90 billion | $3.93 billion |
- Total debt was $3.13 billion before net discounts, premiums and issuance costs. Approximately 90% was fixed-rate or effectively fixed-rate debt, with a weighted-average interest rate of 3.90% and weighted-average maturity of 4.4 years.
- The $850 million unsecured revolving facility had $713.5 million of remaining borrowing capacity at March 31, 2022. The Company was in compliance with its debt covenants.
- Cash, cash equivalents, restricted cash and short-term deposits totaled approximately $207.2 million. The $125.0 million short-term deposit matured on April 7, 2022 and was used to repay revolving borrowings.
- Debt maturities and scheduled principal payments totaled approximately $86.1 million for the remainder of 2022 and $518.1 million in 2023. The Company identified $256.9 million of secured debt maturing before March 31, 2023, excluding scheduled monthly principal payments.
- Cash used in investing activities was $62.2 million, including the $44.1 million Pebble Marketplace acquisition and $23.8 million of capital expenditures. Cash used in financing activities was $5.6 million after $80.0 million of borrowings, $42.2 million of debt payments and $42.2 million of distributions.
Material changes versus the prior comparable period
- Revenue increased 180%, primarily because the RPAI portfolio contributed approximately $120.8 million of incremental rental income.
- Expenses increased 227% to $188.5 million, driven principally by RPAI-related depreciation and amortization, property operating costs, real estate taxes and higher corporate expenses.
- Depreciation and amortization increased to $121.5 million from $30.6 million, including $92.9 million attributable to the RPAI portfolio.
- Interest expense increased to $25.5 million from $12.2 million because of debt assumed in the merger.
- Q1 2022 included a $3.2 million gain from selling a portion of Hamilton Crossing Centre. Q1 2021 included a $26.2 million gain from selling 16 ground leases, making GAAP earnings comparisons less representative of recurring performance.
- Operating cash flow increased to $49.6 million from $31.3 million, while investing cash flow shifted from $33.9 million provided to $62.2 million used due to acquisitions and higher capital expenditures.
Outlook, management commentary, risks and unusual items
Management stated that it expects adequate liquidity over the next 12 months and beyond, supported by operating cash flow, cash and deposits, revolving capacity and access to capital markets. The filing does not provide formal earnings, FFO or revenue guidance.
- Management expects approximately $100 million of additional major tenant improvement costs over the next 12 to 18 months for executed leases covering currently vacant space.
- The seven development projects under construction had estimated total costs of $176.1 million, of which the Company’s share was estimated at $112.2 million; $21.0 million had been incurred as of March 31, 2022.
- Inflationary pressure may affect operating expenses and interest costs. Lease escalations, expense reimbursements and percentage-rent provisions may partially offset inflation.
- COVID-19 remains a risk to tenant financial condition, consumer behavior, collections, occupancy, property values and capital-market access. The Company cannot estimate the pandemic’s ultimate impact.
- Additional risks include interest-rate volatility, refinancing and debt covenant risk, tenant credit quality, real estate market conditions, merger integration, development and redevelopment execution, geographic concentration, e-commerce effects, property impairment, environmental liabilities, severe weather, cybersecurity and maintenance of REIT status.
- The Company had $720 million of cash-flow hedges and $155 million of fair-value hedges. A 100-basis-point change in rates on unhedged variable-rate debt would change annual cash flow by approximately $3.2 million.
- Subsequent to quarter-end, the Company acquired a two-tenant building for $21.9 million, repaid an $11.4 million mortgage and increased its authorized share repurchase program from $150 million to $300 million. No shares had been repurchased under the announced program as of March 31, 2022; 42,885 shares were surrendered by employees to satisfy tax obligations.
- Management reported no material litigation and stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Separate the impact of the RPAI merger from organic operating trends when assessing revenue, NOI, occupancy, margins and leverage.
- Reconcile GAAP net loss with FFO and adjusted FFO, and assess whether the reported FFO benefits from nonrecurring collection activity or other adjustments.
- Review the $256.9 million of secured debt maturing before March 31, 2023 and the broader 2023 maturity schedule, including refinancing assumptions and interest-rate exposure.
- Monitor tenant improvement commitments of approximately $100 million and the $112.2 million estimated Company share of remaining development costs.
- Confirm the post-quarter-end application of the $125 million deposit to revolving debt and the resulting debt, liquidity and covenant position.
- Evaluate whether occupancy, leasing spreads and same-property NOI improvements offset persistent pandemic, inflation, tenant-credit and capital-market risks.