Kite Realty Group Trust — Q1 2017 Form 10-Q Summary
Business context and reporting period
Combined quarterly filing for Kite Realty Group Trust and Kite Realty Group, L.P. for the three months ended March 31, 2017, filed May 9, 2017. The Company is a REIT focused on owning, operating, acquiring, developing, and redeveloping neighborhood and community shopping centers in selected U.S. markets. At quarter-end, it owned interests in 118 operating and redevelopment properties, two development projects under construction, and approximately 97.7% of the Operating Partnership.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $90.1 million | $88.6 million | +$1.6 million, 1.8% |
| Operating income | $8.1 million | $17.7 million | -$9.6 million |
| Consolidated net income | $0.4 million | $2.0 million | -$1.5 million |
| Net income attributable to common shareholders | $0.005 million | $1.4 million | -$1.4 million |
| Net income per share, basic and diluted | $0.00 | $0.02 | Declined |
| Cash flow from operations | $35.6 million | $32.4 million | +$3.2 million, 9.9% |
| FFO attributable to common shareholders | $42.9 million | $42.6 million | +$0.3 million, 0.8% |
| Same-property NOI | $56.1 million | $54.4 million | +3.1% |
Revenue growth was driven by higher minimum rent and tenant reimbursements. Operating margin declined to approximately 9.0% from 20.0%, primarily because of a $7.4 million non-cash impairment charge, higher depreciation and amortization, and higher property operating costs. Interest expense increased 7.3% to $16.4 million. The Company reported a $8.9 million gain on the sale of Cove Center, which substantially offset the impairment and produced positive consolidated net income.
Same-property economic occupancy improved to 93.9% from 93.3%, while leased percentage was 95.1% versus 95.5%. Annualized base rent per square foot increased to $15.70 from $15.24. The Company executed 80 new and renewal leases covering 509,364 square feet and reported a 9% blended rent spread on comparable leases.
Balance sheet, debt, liquidity, and cash flow
- Total assets were $3.62 billion at March 31, 2017, including $3.40 billion of net investment properties.
- Mortgage and other indebtedness was $1.73 billion, compared with $1.73 billion at December 31, 2016. Debt had a weighted-average interest rate of 3.95% and weighted-average maturity of 6.2 years.
- Approximately 93% of debt was fixed-rate or effectively fixed-rate after hedging; 7% was variable-rate. Interest-rate derivatives had $461.1 million of notional value.
- Cash and cash equivalents were $22.6 million. The Company reported approximately $410 million of borrowing capacity under its unsecured revolving credit facility, after considering outstanding borrowings, letters of credit, and borrowing-base limitations.
- Net debt to annualized adjusted EBITDA was 6.9x. This is a non-GAAP measure defined by the Company.
- Operating cash flow of $35.6 million funded $23.8 million of capital expenditures and supported $26.3 million of distributions to common shareholders and Common Unit holders.
- First-quarter debt activity included $33.2 million of borrowings and $37.2 million of repayments. The Company used $22.8 million of sale proceeds from Cove Center to repay revolving-credit borrowings.
- The Board declared a quarterly distribution of $0.3025 per common share and Common Unit, paid April 13, 2017.
Material changes versus the prior comparable period
- Revenue increased modestly, but operating income and common-shareholder earnings declined because of the impairment charge, higher depreciation and amortization, and higher interest expense.
- Cash flow from operations improved, and investing cash flow changed from a $24.6 million use in Q1 2016 to a $1.4 million source in Q1 2017, principally because of the Cove Center disposition.
- Same-property NOI increased 3.1%, supported by higher rents, improved economic occupancy, and better recoveries.
- The Company sold Cove Center in Stuart, Florida, for gross proceeds of $23.1 million and a net gain of $8.9 million.
- The Company acquired its partner’s remaining interest in Fishers Station for $3.8 million, increasing ownership to 100%.
- A joint-venture partner exercised a redemption right for $8.3 million of Class B interests; the Company expected to fund the cash redemption before December 27, 2017.
- Investment property cost declined to $3.98 billion from $4.00 billion, while accumulated depreciation increased.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide formal full-year earnings or FFO guidance. Management stated that it expects sufficient financing to complete current development and redevelopment projects, primarily through operating cash flow and the unsecured revolving credit facility.
- Two development projects under construction had estimated total costs of $90.8 million, with $85.9 million incurred and approximately $4.9 million remaining, mostly expected within 12 months.
- Nine 3-R projects were under construction with estimated aggregate costs of $60.5 million to $68.0 million through mid-2018. Additional 3-R opportunities were estimated at $75 million to $95 million.
- The Company expected approximately $12 million to $14 million of additional major tenant improvements and renovation costs over the following 12 months.
- The $7.4 million impairment was based on a $26.0 million Level 3 fair-value estimate following a change in facts and circumstances and a shortened intended holding period.
- Management reported compliance with applicable debt covenants and stated that there were no material litigation matters or material off-balance-sheet arrangements.
- Key risks include tenant credit quality and bankruptcies, retail-sector and economic conditions, online retail competition, interest rates, refinancing and capital-market access, property impairments, development and redevelopment execution, geographic concentration in Florida, Indiana, and Texas, REIT qualification, environmental liabilities, insurance, and cybersecurity.
- The Company adopted ASU 2017-01 in the first quarter. It expected future acquisitions of single investment properties generally to result in capitalized transaction costs rather than transaction-cost expense. It expected limited initial impact from the forthcoming revenue standard and balance-sheet and expense changes from the forthcoming lease standard.
Most important facts for investors to verify
- Whether same-property NOI and occupancy improvements continue to offset elevated interest, redevelopment, and property operating costs.
- The sustainability of distributions relative to recurring operating cash flow, capital expenditures, FFO, and required REIT distributions.
- Debt maturities, refinancing requirements, covenant headroom, and the availability and cost of revolving-credit capacity.
- Progress, leasing, remaining costs, and expected returns for the two development projects and the 3-R redevelopment pipeline.
- The likelihood of additional property impairments, particularly given the Q1 2017 impairment and reliance on Level 3 valuation assumptions.
- The timing and funding of the $8.3 million joint-venture redemption and other redeemable noncontrolling interests.
- Tenant concentration, retail-market exposure, and the effects of online retail on shopping-center valuations and leasing demand.