Kite Realty Group Trust — Q2 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015. Kite Realty Group Trust operates through Kite Realty Group, L.P. and owns, operates, acquires, develops, and redevelops neighborhood and community shopping centers in selected U.S. markets. At quarter-end, the Company owned interests in 119 operating and redevelopment properties and three development properties under construction. The Parent Company owned approximately 97.8% of the Operating Partnership.
Year-over-year comparisons are significantly affected by the July 2014 Inland Diversified merger, which added 60 properties and approximately $0.9 billion of assumed debt.
Financial performance and key metrics
| ($ in thousands, except per-share data) | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $83,735 | $40,843 | $170,564 | $83,503 |
| Operating income | $16,099 | $4,319 | $34,581 | $9,524 |
| Operating margin | 19.2% | 10.6% | 20.3% | 11.4% |
| Consolidated net income | $7,235 | $(3,196) | $15,096 | $1,275 |
| Net income attributable to common shareholders | $4,613 | $(5,090) | $9,677 | $(2,872) |
| Net income per common share | $0.06 | $(0.16) | $0.12 | $(0.08) |
| Funds from operations attributable to common shareholders | $44,915 | $13,472 | $86,198 | $25,832 |
| Adjusted FFO of the Kite Portfolio | $41,621 | $17,432 | $83,870 | $34,897 |
Same-property NOI increased 3.7% in the quarter and 4.0% year to date. Same-property economic occupancy improved to 92.9% from 92.5%, while leased percentage was 94.9%. Comparable signed leases produced an 8.0% blended rent spread during the quarter.
Six-month operating cash flow was $85.9 million, compared with $22.8 million in the prior-year period. Investing cash flow was an outflow of $17.2 million, and financing cash flow was an outflow of $42.4 million. Cash and cash equivalents increased to $70.1 million from $43.8 million at December 31, 2014.
Debt, liquidity, and capital resources
- Total mortgage and other indebtedness was $1.619 billion at June 30, 2015, versus $1.554 billion at December 31, 2014.
- Considering interest-rate hedges, approximately 81% of debt was fixed-rate and 19% was variable-rate; weighted-average interest rate was 3.70% and weighted-average maturity was 4.8 years.
- The unsecured term loan was increased from $230 million to $400 million. The Company had $166.6 million outstanding on its revolving facility and approximately $322.8 million available for future borrowing, plus approximately $111 million of additional potential capacity from unencumbered assets.
- Cash included approximately $43.8 million reserved for future acquisitions. No debt was scheduled to mature before December 31, 2015, excluding scheduled principal amortization.
- The Company was in compliance with its debt covenants at quarter-end. Net debt to annualized adjusted EBITDA was reported at 6.5x.
- The Company declared a quarterly common distribution of $0.2725 per share/Common Unit and a Series A preferred distribution of $0.515625 per share.
Material changes versus the prior comparable period
- Revenue more than doubled year over year, primarily from the Inland Diversified merger and subsequent acquisitions. Six-month revenue increased 104.3%.
- Common-shareholder earnings improved from losses of $5.1 million in Q2 2014 and $2.9 million for the first six months of 2014 to positive earnings of $4.6 million and $9.7 million, respectively.
- Operating income increased substantially despite higher depreciation, property operating costs, real estate taxes, general and administrative costs, and interest expense associated with the larger asset and debt base.
- Merger and acquisition costs declined to $0.3 million in Q2 and $0.5 million year to date, compared with $3.3 million and $7.8 million in the prior-year periods.
- The Company acquired Colleyville Downs and Belle Isle Station during the quarter and acquired partners’ interests in the Beacon Hill and Bayport Commons properties. It also sold seven properties to IREIT in March 2015 for net proceeds of $103.0 million and recognized a $3.4 million gain.
- A $4.5 million net gain from an eminent-domain settlement was recorded in Q2 2015; proceeds were placed in escrow with the mortgage lender.
Outlook, management commentary, risks, and unusual items
No formal earnings or operating guidance was provided. Management emphasized continued acquisition, development, redevelopment, and selective disposition activity. In July 2015, the Company agreed in principle to issue $250 million of senior unsecured notes at a blended rate of 4.41% and average maturity of 9.8 years, subject to definitive documentation and customary closing conditions.
Subsequent to quarter-end, the Company acquired Livingston Shopping Center for funding consisting of cash, including $31.1 million from property-sale escrows, and a $13.1 million revolver draw.
- Three development and two redevelopment projects were under construction, with estimated total costs of $188.8 million, $54.8 million of which remained to be spent over the following 12 to 18 months.
- Management expected approximately $13 million to $15 million of additional major tenant improvements and renovation costs over the next 12 months.
- Potential earnout obligations totaled approximately $7.9 million, with remaining expiration dates from November 2 through December 28, 2015.
- Interest-rate exposure remains material: a 100-basis-point change in rates on unhedged variable-rate debt was estimated to change annual cash flow by approximately $3.0 million.
- Key risks include tenant financial condition and bankruptcies, economic and retail-market conditions, refinancing and interest-rate risk, property values, development execution, geographic concentration, environmental liabilities, and maintaining REIT qualification.
- The Company reported no material litigation, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts investors should verify
- Whether the planned $250 million senior-notes private placement closed and on what final terms.
- Post-quarter-end leverage, liquidity, and the effect of the Livingston Shopping Center acquisition and $13.1 million revolver draw.
- Progress, leasing, remaining costs, and expected returns for the development and redevelopment pipeline.
- Tenant occupancy, rent spreads, tenant-improvement requirements, and exposure to tenant bankruptcies.
- Debt maturity/refinancing requirements, covenant headroom, variable-rate exposure, and the status of the Series A preferred shares callable beginning in December 2015.
- The comparability of reported growth, given the substantial contribution from the Inland Diversified merger and subsequent acquisitions.