Business Context and Reporting Period
Kite Realty Group Trust (the "Company") is a real estate investment trust (REIT) engaged in the ownership, operation, and development of neighborhood and community shopping centers and commercial properties. This Form 10-Q covers the quarterly period ended June 30, 2009. As of this date, the Company owned interests in 55 operating properties and eight properties under development or redevelopment. The Company is an accelerated filer and maintains its status as a REIT for federal income tax purposes.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $60.6 million | $66.5 million |
| Net Income (Consolidated) | $1.2 million | $6.7 million |
| Net Income Attributable to Kite | $0.96 million | $5.17 million |
| Funds From Operations (FFO) Allocable to Company | $14.4 million | $18.0 million |
| Cash and Cash Equivalents | $57.3 million | $12.0 million (end of period 2008) |
| Total Debt | $669.7 million | $677.7 million (Dec 31, 2008) |
| Weighted Average Interest Rate | 5.13% | N/A |
| Dividends Declared per Common Share | $0.2125 | $0.4100 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by approximately $5.9 million (9%) compared to the prior year. This was driven by a $4.8 million decrease in "Other property related revenue" (primarily due to lower gains on land sales) and a $0.7 million decrease in construction and service fee revenue due to reduced third-party construction activity.
- Net Income Drop: Net income attributable to the Company fell by approximately $4.2 million (81%) year-over-year. This decline is attributed to lower rental income from tenant terminations (including Circuit City), reduced construction revenue, and higher bad debt expenses.
- Liquidity Improvement: Cash and cash equivalents increased significantly from $9.9 million at year-end 2008 to $57.3 million at June 30, 2009. This increase was primarily due to net proceeds of $87.6 million from a common share offering in May 2009, partially offset by debt repayments.
- Debt Reduction: Total mortgage and other indebtedness decreased by approximately $7.9 million from December 31, 2008, as the Company used equity proceeds to pay down its unsecured revolving credit facility.
- Dividend Reduction: The quarterly dividend was reduced to $0.06 per share for Q2 2009, down from $0.2050 in Q2 2008, to conserve liquidity.
Outlook, Risks, and Management Commentary
- Economic Environment: Management highlights the severe impact of the recession, rising unemployment, and decreased consumer confidence on retail tenants. This has led to increased difficulty in collecting rent, lease terminations, and tenant bankruptcies. Occupancy rates declined to approximately 91% as of June 30, 2009, from 93% in the prior year.
- Financing Strategy: Approximately $29 million of consolidated debt is scheduled to mature in the remainder of 2009. Management believes it can refinance or extend these obligations using existing relationships, the unsecured revolving credit facility (which had $56 million available), or cash on hand.
- Development Pipeline: The Company has a "shadow" development pipeline of six projects with an estimated cost of $304 million. Management has reduced estimated capital expenditures in this pipeline by $110 million by focusing on ground leasing or selling land parcels rather than full development.
- Key Risks: Significant risks include the inability to refinance debt on acceptable terms, continued tenant defaults and bankruptcies, and the potential for further declines in property values and rental rates.
- Unusual Items: The Company recorded a $1.2 million provision for credit losses in the first six months of 2009, reflecting increased bad debt expense. Additionally, the Company adopted SFAS 160, reclassifying noncontrolling interests from liabilities to equity.
Investor Verification Checklist
- Debt Maturities: Verify the Company's ability to refinance the $29 million in debt maturing in late 2009, specifically the loans at Ridge Plaza and Boulevard Crossing.
- Tenant Concentration: Assess the impact of anchor tenant vacancies (e.g., Circuit City) on rental income stability and the timeline for re-leasing these spaces.
- Development Funding: Confirm the status of financing for the Eddy Street Commons project and the Company's exposure to the $15.4 million joint guarantee on the apartment developer's loan.
- Credit Facility Covenants: Review compliance with the unsecured revolving credit facility covenants, particularly the leverage ratio and minimum tangible net worth requirements.
- Dividend Sustainability: Evaluate whether the reduced dividend rate of $0.06 per share is sustainable given the current cash flow from operations and the need to maintain REIT status.