KRG

Business Context and Reporting Period

Kite Realty Group Trust filed its Quarterly Report on Form 10-Q for the period ended March 31, 2006. The Company is a vertically integrated Real Estate Investment Trust (REIT) focused on the development, construction, acquisition, ownership, and operation of neighborhood and community shopping centers. As of the reporting date, the portfolio included 42 operating retail properties (approx. 6.7 million sq. ft.), 12 properties under development, and four operating commercial properties.

Key Financial Metrics

Debt Composition: Total debt consists of $268.8 million in fixed-rate debt (69%) and $119.5 million in variable-rate debt (31%), with a weighted average interest rate of 6.08%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 48% year-over-year, driven primarily by a 156% surge in construction and service fee revenue ($7.9M vs. $3.1M) and a 28% increase in rental income due to acquisitions and new developments placed in service in 2005.
• Expense Increases: Operating expenses rose significantly, with real estate taxes up 67% (largely due to reassessments) and depreciation/amortization up 56% (reflecting new assets and write-offs of tenant improvements at Glendale Mall).
• Net Income Decline: Despite higher revenue, Net Income decreased slightly by 2% ($42,113) due to increased interest expense (up 22%) and higher operating costs offsetting the revenue gains.
• FFO Improvement: Funds From Operations increased 43% to $7.6 million, reflecting the operational impact of new properties and excluding non-cash depreciation charges.

Outlook, Risks, and Contingencies

• Development Pipeline: The Company has 12 development projects underway with an estimated total cost of $178 million; approximately $102 million had been incurred as of March 31, 2006.
• Liquidity: Cash on hand is $9.6 million. The revolving credit facility has a borrowing base of $126.5 million with approximately $20.0 million available for additional borrowings. The facility can expand to a maximum of $250 million.
• Tenant Bankruptcy Risks:
  • Winn-Dixie: Filed for Chapter 11 bankruptcy. The Company successfully bid $1.35 million to acquire the lease at Shops at Eagle Creek (51,700 sq. ft.) during a bankruptcy auction. The tenant continues to operate at Waterford Lakes but announced plans to close the Eagle Creek location.
  • Ultimate Electronics: Previously rejected leases at Cedar Hill Village and Galleria Plaza. Replacement tenants (24 Hour Fitness and Shoe Pavilion) began paying rent in February 2006.
• Glendale Mall: This property (approx. 4.2% of total annualized base rent) is 78% leased. Management is evaluating strategic alternatives, including redevelopment or sale.
• Subsequent Events: In April 2006, the Company acquired Kedron Village in Georgia for $36.9 million (77.6% pre-leased) and invested $7.25 million in a joint venture for a development parcel in Oldsmar, Florida.

Investor Verification Checklist

• Verify the status of the Winn-Dixie lease auction approval scheduled for May 18, 2006, and the timeline for leasing the vacated space at Shops at Eagle Creek.
• Confirm the progress of the $178 million development pipeline and the Company's ability to fund the remaining $76 million through existing credit facilities or equity markets.
• Monitor the leasing velocity and strategic decision-making regarding Glendale Mall, given its significant contribution to base rent and current vacancy levels.
• Review the impact of rising interest rates on the 31% of debt that remains variable, despite the $65 million hedging program.
• Assess the integration and performance of the newly acquired Kedron Village property and the Oldsmar, Florida joint venture.