Kite Realty Group Trust — Q3 2012 Form 10-Q Summary
Business context and reporting period
Kite Realty Group Trust is a REIT focused on owning, operating, leasing, acquiring, redeveloping, and developing neighborhood and community shopping centers and selected commercial properties. The filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
At September 30, 2012, the Company owned interests in 60 properties: 53 retail operating properties, five retail properties under redevelopment, and two commercial operating properties. It also had two in-process retail developments and three properties classified as held for sale.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $25.4 million | $23.5 million | $74.8 million | $69.8 million |
| Operating income | $4.9 million | $6.1 million | $14.3 million | $15.5 million |
| Operating margin | 19.2% | 26.1% | 19.2% | 22.2% |
| Net income attributable to Kite | $(0.9) million | $0.8 million | $0.02 million | $0.5 million |
| Net loss attributable to common shareholders | $(3.0) million | $(0.6) million | $(5.8) million | $(3.9) million |
| Common loss per share | $(0.05) | $(0.01) | $(0.09) | $(0.06) |
| Funds from operations allocable to the Company | $7.1 million | $7.1 million | $19.7 million | $20.6 million |
| Adjusted FFO of the Kite Portfolio | $7.9 million | $7.9 million | $23.8 million | $23.2 million |
Revenue increased 8.1% in the quarter and 7.1% year to date, principally from acquisitions, development properties becoming operational, redevelopment activity, improved occupancy, higher rental rates, and improved tenant expense recoveries. Retail operating portfolio leased percentage was 93.4% at September 30, 2012, compared with 93.1% a year earlier.
Same-property NOI increased 1.9% in the quarter and 3.2% for the first nine months. The decline in operating margin reflected substantially higher depreciation and amortization, including accelerated depreciation associated with Four Corner Square and Rangeline Crossing redevelopments, as well as higher general and administrative expense and interest expense.
Balance sheet, debt, liquidity, and cash flow
- Total assets were $1.22 billion at September 30, 2012, compared with $1.19 billion at December 31, 2011.
- Net real estate investments were $1.12 billion, including $182.9 million of construction in progress.
- Mortgage and other indebtedness was $680.4 million, compared with $689.1 million at year-end 2011. Total debt had a weighted-average interest rate of 4.59% and weighted-average maturity of 4.9 years.
- After interest-rate hedges, approximately 74% of debt was effectively fixed-rate and 26% remained variable-rate. Hedge notional amounts totaled $154.4 million.
- Cash and cash equivalents were $9.9 million. The Company reported approximately $32 million of additional borrowing capacity under its unsecured revolving credit facility and term loan, subject to borrowing-base and covenant requirements.
- Net cash provided by operating activities was $20.7 million for the first nine months, compared with $21.2 million in 2011.
- Net cash used in investing activities was $16.2 million, including $68.8 million of capital expenditures, offset by $61.8 million of net property-sale proceeds.
- Net cash used in financing activities was $4.7 million, reflecting debt repayments, distributions, and equity proceeds.
The Company entered into a $125 million unsecured term loan maturing in April 2019 and amended its revolving facility, extending its maturity to April 2016, with a potential one-year extension. Management stated that the Company was in compliance with applicable debt covenants at September 30, 2012.
Material changes versus the prior comparable period
- Revenue grew, but operating income declined 7.6% for the quarter and 7.6% for the first nine months because expense growth, depreciation, and interest costs exceeded revenue growth.
- Common-shareholder losses widened to $3.0 million in the third quarter and $5.8 million year to date, partly due to increased preferred dividends following the issuance of 1.3 million Series A preferred shares.
- Same-property NOI improved, while the retail portfolio’s leased percentage increased modestly.
- The Company acquired Cove Center for $22.1 million and 12th Street Plaza for $15.2 million.
- The Company sold Gateway Shopping Center, South Elgin Commons, Coral Springs Plaza, and 50 South Morton. These dispositions generated significant year-to-date discontinued-operation income, including a $5.2 million gain primarily associated with Gateway Shopping Center.
- Preferred-share proceeds of $31.3 million, common-share issuance proceeds of $3.0 million, property-sale proceeds, and new debt were used to fund acquisitions, development, and debt repayments.
Guidance, outlook, commentary, risks, and unusual items
Management expected Delray Marketplace to open in the fourth quarter of 2012; the project was 77.2% leased or committed and had estimated total costs of $94 million. Holly Springs Towne Center was 83.5% leased or committed, and Four Corner Square was 85.3% leased or committed.
The Company had five in-process development or redevelopment projects with estimated total costs of approximately $195 million, of which $128 million had been incurred. Approximately $67 million of additional costs were expected over the following 12 months. Management believed financing was in place, primarily through construction loans and the unsecured facility.
Near-term property-level debt maturities totaled approximately $32.5 million over the following 12 months, excluding scheduled principal payments. Management was pursuing repayment, refinancing, extensions, capital-markets transactions, and property sales.
- A $1.3 million litigation charge was recorded in the first quarter related to a former tenant; the amount had been paid and the claim released.
- Interest-rate hedge liabilities were $6.4 million at September 30, 2012, and the Company expected approximately $2.6 million of additional interest expense over the next 12 months as hedged forecasted payments occurred.
- The Company had completion guarantees and other commitments related to development projects, including an apartment construction-loan guarantee with an outstanding balance of $30.3 million and an estimated completion obligation of approximately $64 million for the Eddy Street Commons project.
- Subsequent to quarter-end, the Company issued 12.075 million common shares for approximately $60 million of net proceeds, initially used to repay its revolving credit facility.
- Subsequent to quarter-end, a wholly owned subsidiary defaulted on payments under a $29.5 million non-recourse loan because property cash flow was insufficient for debt service. The loan accrued interest at 5.70% plus a 4.00% default rate. Management stated that the default did not trigger cross-defaults on other debt or derivatives.
- Key risks include tenant financial weakness and bankruptcies, uncertain consumer and economic conditions, refinancing and liquidity risk, interest-rate volatility, development and redevelopment execution, property-value declines, geographic concentration, and maintaining REIT qualification.
Most important facts for an investor to verify
- Whether the post-quarter-end $29.5 million loan default leads to foreclosure, restructuring, impairment, additional cash requirements, or broader lender actions.
- The status and cost-to-complete of Delray Marketplace, Holly Springs Towne Center, Four Corner Square, Rangeline Crossing, and other development or redevelopment projects.
- The Company’s ability to refinance or repay approximately $32.5 million of near-term property-level maturities and maintain revolving-credit availability.
- The effect of the 12.075 million-share offering on leverage, per-share metrics, distributions, and future capital needs.
- Whether same-property leasing and NOI gains can offset higher depreciation, interest expense, preferred dividends, and development costs.
- The sustainability of common and preferred distributions given negative common-shareholder earnings and cash requirements for debt, construction, tenant improvements, and redevelopment.