KITE REALTY GROUP TRUST annual report, FY2019

Kite Realty Group Trust: FY2019 Form 10-K Summary

Business Context and Reporting Period

Annual report for the fiscal year ended December 31, 2019, filed February 20, 2020. Kite Realty Group Trust operates primarily through Kite Realty Group, L.P., owning, operating, acquiring, developing and redeveloping neighborhood and community shopping centers in the United States. The Parent Company owned approximately 97.5% of the Operating Partnership at year-end.

At December 31, 2019, the Company owned interests in 90 operating and redevelopment properties totaling approximately 17.4 million square feet, plus one development project under construction. The retail operating portfolio was 96.1% leased.

Financial and Operating Metrics

Metric	2019	2018	Change
Total revenue	$315.2 million	$354.2 million	Down $39.0 million
Operating income	$71.8 million	$21.0 million	Up $50.7 million
Net income attributable to common shareholders	$(0.5) million	$(46.6) million	Improved $46.0 million
Basic and diluted EPS	$(0.01)	$(0.56)	Improved
FFO of Operating Partnership	$131.4 million	$171.2 million	Down $39.8 million
Adjusted FFO of Operating Partnership	$143.0 million	$171.2 million	Down $28.2 million
Same Property NOI	$204.6 million	$200.1 million	Up 2.2%
Cash flow from operating activities	$138.0 million	$154.4 million	Down $16.4 million
Net cash provided by investing activities	$416.6 million	$148.3 million	Up $268.3 million
Net cash used in financing activities	$(547.2) million	$(289.4) million	Greater use of cash
Investment properties, net	$2.42 billion	$2.94 billion	Down $520.8 million
Mortgage and other indebtedness, net	$1.15 billion	$1.54 billion	Down $396.7 million

Calculated operating margin was approximately 22.8% in 2019 versus 5.9% in 2018. Net margin attributable to common shareholders was approximately negative 0.2% in 2019 versus negative 13.1% in 2018. The improvement in GAAP earnings was driven primarily by higher property-sale gains and lower impairment and depreciation charges, while recurring revenue and FFO declined because of substantial asset dispositions.

Annualized base rent per square foot increased 5.9% to $17.83.
Small-shop leased percentage reached 92.5%, described as a Company record; anchor leased percentage was 97.8%.
The Company executed 302 new and renewal leases covering approximately 2.0 million square feet, with a 9.2% blended cash rent spread and a 14.5% blended GAAP rent spread.
No individual retail tenant accounted for more than 2.5% of annualized base rent; the largest 25 tenants represented 32.1%.
Distributions declared remained $1.27 per common share and Common Unit. Management estimated that 35.2% of 2019 distributions represented return of capital, 35.1% capital gains and 29.7% ordinary income.

Material Changes Versus the Prior Comparable Period

Project Focus: The Company completed its asset-recycling program in October 2019, selling 23 non-core assets for approximately $543.8 million at an approximately 8% blended capitalization rate. Most proceeds were used to repay debt.
Rental income declined 8.9% to $308.4 million, primarily because of properties sold in 2018 and 2019. Same-property performance improved through higher rents and occupancy.
Impairment charges fell to $37.7 million from $70.4 million, but remained material and related to seven properties following reductions in expected holding periods.
Net gains on property sales increased to $39.0 million from $3.4 million.
Interest expense declined 11.3% to $59.3 million as debt was reduced.
General, administrative and other expense increased 32.3% to $28.2 million, including $5.4 million of costs expensed following adoption of the new lease accounting standard.
The portfolio contracted from 111 operating and redevelopment properties at year-end 2018 to 90 at year-end 2019.

Debt, Liquidity and Capital Allocation

Year-end consolidated debt was $1.15 billion, with 97% fixed-rate or hedged and 3% variable-rate. The weighted-average interest rate was 3.93% and weighted-average maturity was 5.8 years.
The unsecured revolving credit facility had no balance outstanding and approximately $583 million of borrowing capacity. Combined cash and borrowing capacity was approximately $614.8 million.
No debt principal was scheduled to mature in 2020 or 2021, excluding scheduled monthly principal payments. The credit facility matures in April 2022, subject to extension options.
Net debt to annualized Adjusted EBITDA was 5.9x, and debt service coverage was 3.6x at year-end.
The Company was in compliance with applicable debt covenants and maintained investment-grade corporate credit ratings from two nationally recognized agencies.
2019 capital expenditures totaled $53.3 million. Management expected approximately $14 million to $20 million of additional major tenant improvements and $14 million to $18 million for releasing vacant anchor space.
Eddy Street Commons Phase II had estimated total project costs of $90.8 million, including a projected Company share of $10.0 million. The Company provided completion guarantees and expected to fund its portion primarily through operating cash flow.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal full-year 2020 earnings or FFO guidance. Management emphasized portfolio quality, leverage reduction, liquidity preservation, selective redevelopment and continued rent growth. The Board declared a first-quarter 2020 distribution of $0.3175 per common share and Common Unit.

Key operating risks include tenant bankruptcies, store closures, reduced retail demand, e-commerce competition, lease expirations and pressure on market rents.
Leases representing 7.2% of total annualized base rent were scheduled to expire in 2020, assuming no renewal options are exercised.
Geographic concentration is significant: Florida represented 25.9% of total annualized base rent, Texas 14.5%, Indiana approximately 15.5% in aggregate, North Carolina 10.0% and Nevada 10.3%.
The Company recorded a $37.7 million non-cash impairment charge in 2019. Valuation depends on projected NOI, holding periods, capital expenditures and capitalization rates, creating potential for additional impairments.
A 100-basis-point increase in rates on unhedged variable-rate debt would reduce annual cash flow by approximately $0.4 million. The Company had $266.2 million of interest-rate hedges and exposure to the transition away from LIBOR.
The Company had a repayment guaranty related to a $33.8 million Embassy Suites construction loan; the outstanding balance was $33.6 million, of which the Company’s share was $11.8 million.
Outstanding contractual obligations totaled approximately $1.51 billion, including $1.42 billion of consolidated debt and interest, $79.2 million of ground leases and $8.9 million of development and tenant-allowance commitments.
The Company identified no material litigation and reported effective internal control over financial reporting. Ernst & Young issued unqualified audit opinions; the critical audit matter concerned impairment of investment properties.

Most Important Facts for Investors to Verify

Reconcile the decline in revenue and FFO with the 23-asset disposition program and assess the recurring earnings power of the smaller, higher-quality portfolio.
Review tenant credit exposure, particularly upcoming 2020 expirations and retailers facing bankruptcy, restructuring or store closures.
Verify the sustainability of 2.2% same-property NOI growth, 96.1% retail occupancy and reported leasing spreads.
Evaluate leverage at 5.9x net debt to Adjusted EBITDA, debt maturities beginning in 2022 and reliance on the revolving facility for future liquidity.
Assess the assumptions supporting the $37.7 million impairment charge and the potential for further valuation reductions.
Confirm funding requirements, guarantees and expected returns for Eddy Street Commons Phase II and other redevelopment projects.
Review the tax characterization of distributions, REIT qualification requirements and the implications of the estimated 35.2% return-of-capital component.