Kite Realty Group Trust — 2011 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2011, filed August 5, 2011. Kite Realty Group Trust, through its operating partnership, owns, operates, leases, acquires, redevelops and develops neighborhood and community shopping centers and selected commercial properties in the United States.
- Portfolio at June 30, 2011: interests in 63 properties, comprising 53 retail operating properties, six retail redevelopment properties and four operating commercial properties.
- Three retail development projects were in process, and four future development projects were in pre-development.
- Retail operating portfolio leased percentage improved to 93.0% from 91.0% at June 30, 2010; small-shop leased percentage was 80.6%.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|
| Total revenue | $25.3 million | $24.8 million | $49.8 million | $50.4 million |
| Operating income | $5.7 million | $2.8 million | $10.9 million | $8.8 million |
| Operating margin | 22.6% | 11.5% | 21.8% | 17.4% |
| Net income attributable to Kite | $0.4 million | $(4.0) million | $(0.3) million | $(5.1) million |
| Net loss attributable to common shareholders | $(1.1) million | $(4.0) million | $(3.2) million | $(5.1) million |
| Net loss per common share | $(0.02) | $(0.06) | $(0.05) | $(0.08) |
| FFO allocable to the Company | $7.5 million | $6.7 million | $13.6 million | $13.0 million |
- Rental income, including tenant reimbursements, increased 8.4% year over year in the second quarter and 6.3% year to date, primarily from improved occupancy, development properties becoming operational and 2011 acquisitions.
- Construction and service fee revenue declined 96% in the quarter and 98% year to date as the Company continued reducing third-party construction activity.
- Interest expense declined 19% in the quarter and 18% year to date, reflecting lower indebtedness following the December 2010 preferred equity issuance and lower borrowing costs after certain interest-rate swaps expired.
- Second-quarter net income benefited from lower depreciation and amortization, including the absence of certain prior-year accelerated write-offs related to redevelopment properties.
Balance Sheet, Debt and Liquidity
| Balance Sheet Metric | June 30, 2011 | December 31, 2010 |
|---|
| Total assets | $1.165 billion | $1.133 billion |
| Net real estate investments | $1.076 billion | $1.048 billion |
| Cash and cash equivalents | $7.6 million | $15.4 million |
| Total mortgage and other indebtedness | $654.3 million | $610.9 million |
| Total equity | $418.1 million | $430.0 million |
- Debt had a weighted-average maturity of 3.3 years and a weighted-average interest rate of 4.95%.
- After considering hedges, 67% of debt was fixed-rate and 33% was variable-rate.
- The Company entered into a new three-year $200 million unsecured revolving credit facility maturing in June 2014, with a one-year extension option. Borrowings bear interest at LIBOR plus 225 to 325 basis points.
- At June 30, $139.3 million was drawn under the facility, with approximately $40.7 million available for additional borrowing based on the unencumbered property pool.
- Cash provided by operating activities was $15.0 million, compared with $14.1 million in the prior-year period.
- Cash used in investing activities was $48.3 million, including $16.4 million for acquisitions, $29.4 million for capital expenditures and $5.8 million contributed to Parkside Town Commons.
- Cash provided by financing activities was $25.5 million, compared with cash used of $4.8 million in the prior-year period. Ending cash declined to $7.6 million.
- The Company reported compliance with all applicable financial covenants at June 30, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly flat for the six-month period because higher rental and other property revenue was offset by the planned wind-down of third-party construction services.
- Operating income increased 24% year to date, while net loss attributable to the Company improved by $4.8 million; however, common shareholders remained in a loss position after $2.9 million of preferred dividends.
- FFO allocable to the Company increased 4.6% year to date to $13.6 million.
- The Company acquired Oleander Point in Wilmington, North Carolina for $3.5 million and Lithia Crossing in Tampa, Florida for $13.3 million. It also acquired the remaining 40% interest in The Centre for approximately $2.2 million.
- Leasing activity improved: 281,000 square feet of new and renewal leases were executed during the quarter and 464,000 square feet year to date.
- Debt increased by $43.4 million from year-end, primarily to fund acquisitions, development, redevelopment and other investment activity.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued leasing opportunities during the remainder of 2011 but cited weak economic growth, elevated unemployment, uncertain consumer spending and federal budget concerns.
- Delray Marketplace was 62.5% pre-leased or committed, with total estimated costs of approximately $95 million and a targeted opening in the fourth quarter of 2012.
- Estimated remaining investment in six redevelopment projects was approximately $23.8 million, based on total estimated investment of $37 million and $13.2 million incurred.
- Total estimated costs for three in-process development projects were $163 million, of which $108.8 million had been incurred. Management expected financing primarily through construction loans.
- As of June 30, debt scheduled to mature during the following 12 months totaled $124.4 million before subsequent refinancing and paydowns. After July activity, the filing presented $64.9 million of maturities over the next 12 months.
- Subsequent to quarter-end, the Company closed $82 million of fixed-rate, 10-year nonrecourse loans at 5.44%; proceeds were used partly to repay variable-rate debt and reduce the credit-line balance.
- The Company had $7.2 million of outstanding letters of credit with no amounts advanced.
- Interest-rate hedge liabilities were $1.8 million at June 30, 2011. Management expected approximately $1.2 million of interest expense to be recognized over the next 12 months from hedged forecasted interest payments.
- A 100-basis-point increase in market rates was estimated to reduce the fair value of fixed-rate debt by $11.8 million and increase annual cash flow costs on variable-rate debt by approximately $2.3 million.
- Material contingencies include completion guarantees for development projects, an $8.1 million guarantee related to Parkside Town Commons debt, a guarantee of an apartment construction loan with a $30.3 million balance, and an expected approximately $64 million share of Eddy Street Commons completion obligations.
- Principal risks include tenant defaults and bankruptcies, rent collection, refinancing and liquidity availability, interest-rate volatility, property valuations, development execution, geographic concentration and maintaining REIT status.
Most Important Facts for Investors to Verify
- Progress on refinancing or extending the remaining near-term debt maturities, including the $20.5 million Gateway Shopping Center loan and other loans totaling approximately $44.4 million.
- Actual availability under the unsecured revolving facility after the subsequent $82 million financing and debt paydowns.
- Leasing, construction costs, financing and completion timing for Delray Marketplace, Cobblestone Plaza, South Elgin Commons and Rivers Edge.
- Whether improved occupancy and rental revenue offset higher property operating expenses, real estate taxes and tenant credit-loss exposure.
- Cash requirements for preferred and common distributions, redevelopment, development commitments, tenant improvements and recurring capital expenditures.
- Exposure under joint-venture guarantees and project completion obligations, including Eddy Street Commons and Parkside Town Commons.
- The filing states that disclosure controls and procedures were effective and that no material change in internal control over financial reporting was identified.
