Kite Realty Group Trust — 2019 Q2 Form 10-Q Summary
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 unaudited filing covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
At June 30, 2019, the Company owned interests in 103 operating and redevelopment properties totaling approximately 19.9 million square feet, plus one development project under construction. The Parent Company owned approximately 97.5% of the Operating Partnership.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Total revenue | $81.5 million | $165.0 million |
| Operating income | $17.3 million | $40.3 million |
| Net income attributable to common shareholders | $(1.8) million | $3.9 million |
| Net income per common share | $(0.02) | $0.05 |
| Funds from operations attributable to common shareholders | $33.3 million | $70.6 million |
| Adjusted FFO of the Operating Partnership | $36.7 million | $75.0 million |
| Net cash provided by operating activities | Not separately reported for the quarter | $69.7 million |
| Cash dividends declared per common share | $0.3175 | $0.6350 |
Quarterly revenue declined 11.2% year over year, while six-month revenue declined 9.1%. Same Property NOI increased 1.7% for the quarter and 1.8% year to date. Economic occupancy was 92.4% for the quarter and 92.3% year to date, compared with 93.0% and 93.1%, respectively, in the prior-year periods.
Balance sheet, debt and liquidity
- Total assets were $2.94 billion at June 30, 2019, compared with $3.17 billion at December 31, 2018.
- Mortgage and other indebtedness was $1.377 billion, down from $1.543 billion at year-end 2018.
- Debt was 91% fixed rate and 9% variable rate, with a weighted-average interest rate of 4.16% and weighted-average maturity of 5.7 years.
- The Company had $35.8 million of cash and cash equivalents and $59.5 million of cash, cash equivalents and restricted cash.
- Approximately $517.2 million was available under the $600 million unsecured revolving credit facility, subject to borrowing-base limitations and covenant compliance.
- Net debt to annualized second-quarter Adjusted EBITDA was 6.4x.
- The Company was in compliance with applicable debt covenants and reported investment-grade corporate credit ratings from two nationally recognized rating agencies.
Cash flow and capital allocation
| Cash flow item | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|
| Operating activities | $69.7 million | $82.0 million |
| Investing activities | $196.9 million provided | $118.1 million provided |
| Financing activities | $(252.5) million used | $(189.0) million used |
| Net proceeds from property sales | $254.2 million | $161.5 million |
| Capital expenditures | $25.2 million | $34.6 million |
| Debt repayments | $240.8 million | $243.9 million |
| Distributions to common shareholders and Common Unit holders | $82.2 million | $55.1 million |
The Company acquired the Pan Am Plaza Garage for approximately $29.5 million and funded the purchase with $30.0 million drawn on the revolving credit facility. It also borrowed $45.0 million for development, redevelopment, tenant improvements and working capital.
Material changes versus the prior comparable period
- Quarterly rental income decreased 7.0%, primarily because of properties sold, partly offset by higher contractual rents and improved small-shop occupancy.
- Six-month rental income decreased 7.2%, largely reflecting dispositions and anchor vacancies.
- Quarterly and year-to-date net income attributable to common shareholders improved from losses of $1.4 million and $19.3 million in 2018 to a loss of $1.8 million and income of $3.9 million in 2019.
- Operating income increased $1.5 million for the quarter and $26.1 million year to date, primarily due to higher gains on property sales and lower depreciation and impairment charges.
- Quarterly impairment charges increased to $25.1 million from $14.8 million; year-to-date impairment charges declined to $29.2 million from $38.8 million.
- General and administrative expense increased 26.7% for the quarter and 20.1% year to date, partly because certain costs were expensed upon adoption of the new lease accounting standard.
- Same Property NOI increased despite lower economic occupancy, supported by contractual rent increases and improved expense recoveries.
- Debt declined by approximately $166.7 million from December 31, 2018, primarily through property-sale proceeds and debt repayments.
Guidance, outlook, risks and unusual items
- Management announced a program to sell up to $500 million of non-core assets to improve portfolio quality, reduce leverage and concentrate on selected markets. Through the filing date, 14 properties had been sold for $414.8 million of proceeds.
- During the second quarter, the Company executed 81 new and renewal leases covering approximately 501,000 square feet. Comparable new leases produced an 8.7% blended rent spread, and six anchor leases were executed.
- Management expects approximately $14 million to $16 million of additional major tenant improvements and $25 million to $35 million to release vacant anchor space over the following 12 months.
- The Company expects to fund its remaining approximately $4.4 million share of development costs over the next 12 to 18 months through operating cash flow or revolver borrowings.
- Five properties were evaluated for impairment in the second quarter, resulting in $25.1 million of non-cash charges. Two were sold in July 2019 and one in August 2019.
- After quarter-end, five additional properties were sold for cumulative proceeds of $157.3 million, with proceeds used to repay debt. The Company expected aggregate gains of approximately $0.6 million in the third quarter.
- The Company adopted the new lease accounting standard on January 1, 2019 and recorded a $27.0 million right-of-use asset and $27.3 million lease liability for ground leases. The adoption also increased current-period expense by approximately $1.4 million in the quarter and $2.6 million year to date.
- Interest-rate derivatives with notional amounts of $266.2 million hedged certain variable-rate debt. The derivatives had a net liability fair value of $16.2 million at June 30, 2019. A 100-basis-point change in rates on unhedged variable-rate debt would affect annual cash flow by approximately $1.0 million.
- Key risks include tenant insolvency and anchor vacancies, retail-sector and online-retail pressures, property-market conditions, refinancing and interest-rate risk, access to capital, impairment risk, geographic concentration in Florida, Indiana and Texas, joint-venture obligations, development execution and continued REIT qualification.
- The Company reported no material litigation and no material changes to its previously disclosed risk factors. Management stated that controls and procedures were effective.
Most important facts for investors to verify
- Whether continued property dispositions and lower asset count will reduce recurring rental revenue and operating cash flow.
- The sustainability of occupancy, anchor tenant replacement, rent spreads and Same Property NOI growth.
- Whether leverage remains manageable as the Company funds tenant improvements, redevelopment and upcoming debt maturities.
- The effect of the $25.1 million second-quarter impairment charge and subsequent property sales on recurring earnings and asset values.
- Whether the $0.3175 quarterly distribution remains adequately covered by recurring FFO and operating cash flow.
- The terms and availability of the revolving credit facility, compliance with covenants, and refinancing requirements beginning in 2021 and thereafter.
- The Company’s exposure under joint-venture debt guarantees, completion guarantees, letters of credit and redeemable noncontrolling interests.