Business Context and Reporting Period
Kite Realty Group Trust, through Kite Realty Group, L.P., owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in selected U.S. markets. The combined unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparable periods in 2016.
- The portfolio included 117 operating and redevelopment properties totaling approximately 23.1 million square feet, plus two development projects under construction.
- The Parent Company owned approximately 97.7% of the Operating Partnership; limited partners owned approximately 2.3%.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 |
|---|---|---|
| Total revenue | $87.1 million | $269.9 million |
| Operating income | $16.2 million | $45.4 million |
| Operating margin | Approximately 18.6% | Approximately 16.8% |
| Net income attributable to common shareholders | $(0.6) million | $9.6 million |
| FFO attributable to common shareholders | $40.9 million | $128.9 million |
| Same Property NOI | $55.2 million, up 3.6% | $165.8 million, up 3.3% |
| Cash provided by operating activities | Not separately provided | $122.1 million |
- Revenue declined 2.2% year over year in the third quarter but increased 1.8% for the nine-month period.
- Third-quarter net loss attributable to common shareholders was $0.01 per share, compared with a $0.02 loss in the prior-year quarter. Nine-month earnings were $0.11 per share, compared with a $0.03 loss in 2016.
- FFO attributable to common shareholders decreased from $42.7 million to $40.9 million in the quarter, but increased from $125.8 million to $128.9 million for the nine months.
- Leased percentage was 94.4% at September 30, 2017, compared with 95.1% a year earlier; economic occupancy improved to 93.5% from 92.8%.
- Annualized base rent per square foot increased to $16.01 from $15.42. Third-quarter comparable new leases produced an 11.1% blended rent spread.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $32.5 million at September 30, 2017, compared with $19.9 million at December 31, 2016.
- Net cash provided by investing activities was $23.1 million, including $76.1 million of net proceeds from property sales and $59.7 million of capital expenditures.
- Net cash used in financing activities was $132.6 million, including $118.8 million of debt repayments and $78.9 million of distributions to common shareholders and Common Unit holders.
- Mortgage and other indebtedness was $1.682 billion, down from $1.731 billion at December 31, 2016. Debt had a weighted-average interest rate of approximately 4.00% and weighted-average maturity of 5.7 years.
- Approximately 94% of debt was fixed-rate or effectively fixed-rate after hedging. Interest-rate derivatives had $460.5 million of notional value and maturities through 2021.
- The unsecured revolving credit facility had $41.1 million outstanding, $5.3 million of letters of credit, and approximately $394.1 million available for future borrowings.
- Net debt to annualized adjusted EBITDA was 6.9x. Management stated that the Company was in compliance with applicable debt covenants and had investment-grade ratings from two rating agencies.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue decreased by $2.0 million, primarily because of property dispositions and redevelopment activity. Lower depreciation and amortization and lower interest expense more than offset higher general and administrative costs, resulting in a $1.1 million improvement in net loss attributable to common shareholders.
- Nine-month operating income declined $2.4 million despite higher revenue, primarily because of a $7.4 million non-cash impairment charge and higher property operating, general and administrative and interest expenses.
- Nine-month consolidated net income improved by $11.9 million, primarily due to $15.2 million of gains on sales of four operating properties, compared with $0.2 million of such gains in 2016.
- Same Property NOI increased 3.6% for the quarter and 3.3% year to date, supported by higher rents, improved economic occupancy and completed redevelopment projects.
- The Company sold Cove Center, Clay Marketplace, The Shops at Village Walk and Wheatland Towne Crossing during the first nine months of 2017. Property sales contributed $76.1 million of net proceeds.
- Property operating expense as a percentage of revenue increased to 13.6% for the quarter and 13.7% for the nine months, compared with 13.4% in each 2016 comparable period.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or FFO guidance.
- Management expects to fund development and redevelopment primarily with operating cash flow and borrowings under the revolving credit facility.
- Eight 3-R projects were under construction, with estimated aggregate costs of $72.5 million to $79.0 million through the end of 2018. Additional redevelopment opportunities were estimated at $45 million to $61 million.
- Two development projects under construction had estimated remaining costs of approximately $9.0 million. The Eddy Street Commons hotel was projected to cost approximately $40 million net of tax increment financing, subject to formation of a minority-owned unconsolidated joint venture.
- The Company expects approximately $14 million to $16 million of additional major tenant improvements and renovation costs over the next 12 months.
- A joint venture partner exercised a redemption right for approximately $8.3 million of noncontrolling interests; the Company expected to fund the cash redemption before December 27, 2017.
- Approximately $38.1 million of secured debt was scheduled to mature before September 30, 2018, excluding scheduled monthly principal payments. Management stated that available liquidity was sufficient to address these maturities.
- Key risks include tenant credit and bankruptcy risk, retail-sector and e-commerce pressures, interest-rate and refinancing risk, geographic concentration in Florida, Indiana and Texas, property valuation and impairment risk, development and redevelopment execution, REIT qualification, environmental liabilities, insurance costs and cybersecurity.
- The filing reported no material litigation and no material changes to internal control effectiveness. Hurricane-related landscaping costs in Florida and bad debt associated with certain tenant bankruptcies increased operating expenses.
Important Facts for Investors to Verify
- Reconcile FFO and adjusted EBITDA to GAAP results and assess the effect of property-sale gains and the $7.4 million impairment charge.
- Review debt maturities, revolving-credit availability, covenant compliance and the Company’s ability to fund redevelopment commitments without increasing leverage.
- Monitor occupancy, tenant bankruptcies, bad debt expense and rent spreads, particularly in the concentrated Florida, Indiana and Texas markets.
- Evaluate the expected returns, budgets and remaining funding needs for the 3-R projects, Eddy Street Commons and other development activity.
- Confirm the timing and cash funding of the $8.3 million noncontrolling-interest redemption and the $38.1 million near-term secured debt maturities.
- Assess the sustainability of the $0.3025 quarterly distribution against operating cash flow, FFO, capital expenditures and required REIT distributions.