Kite Realty Group Trust 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2011, filed November 7, 2011. Kite Realty Group Trust, through its majority-owned operating partnership, owns, operates, leases, acquires, redevelops and develops neighborhood and community shopping centers and certain commercial properties in the United States.
- Portfolio: 63 properties, including 53 retail operating properties, six retail properties under redevelopment and four commercial operating properties.
- Also held two in-process retail development properties and interests in future development land.
- Retail operating portfolio leased percentage was 93.1% at September 30, 2011, versus 92.2% at September 30, 2010; small-shop leased percentage was 80.0% versus 77.7%.
Financial Performance and Key Metrics
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Total revenue | $25.5 million | $25.2 million | $75.2 million | $75.5 million |
| Operating income | $7.1 million | $4.4 million | $18.0 million | $13.1 million |
| Operating margin | 28.1% | 17.3% | 24.0% | 17.4% |
| Net income attributable to Kite | $0.8 million | $(2.4) million | $0.5 million | $(7.5) million |
| Net loss attributable to common shareholders | $(0.6) million | $(2.4) million | $(3.9) million | $(7.5) million |
| Loss per common share | $(0.01) | $(0.04) | $(0.06) | $(0.12) |
| FFO allocable to the Company | $7.1 million | $6.9 million | $20.6 million | $19.9 million |
| FFO per Operating Partnership share | $0.11 | $0.11 | $0.32 | $0.32 |
Rental income, including tenant reimbursements, increased 8.4% in the quarter and 7.0% year to date, supported by improved occupancy and rental rates, development properties becoming operational, acquisitions and redevelopment activity. Construction and service fee revenue declined 86% in the quarter and 95% year to date as the Company continued reducing third-party construction activity.
Operating income improved primarily because of lower depreciation and amortization, including the absence of prior-year accelerated write-offs associated with redevelopment, lower interest expense and higher rental income. Preferred dividends of $4.3 million year to date caused common shareholders to remain in a net loss position despite positive net income attributable to the Company.
Cash Flow, Balance Sheet, Debt and Liquidity
- Total assets were $1.188 billion at September 30, 2011, versus $1.133 billion at December 31, 2010. Net real estate investments were $1.088 billion.
- Cash and cash equivalents were $9.2 million, down from $15.4 million at year-end 2010.
- Mortgage and other indebtedness was $675.8 million, up from $610.9 million at December 31, 2010. Total debt had a weighted-average interest rate of 4.94% and weighted-average maturity of 4.1 years.
- Including hedges, 69% of debt was fixed-rate and 31% was variable-rate. Interest-rate hedges had aggregate notional amounts of approximately $89 million.
- Cash provided by operating activities was $21.2 million, compared with $24.6 million in the prior-year period.
- Cash used in investing activities was $68.9 million, primarily reflecting $50.3 million of capital expenditures, $16.4 million of acquisitions and $8.2 million of contributions to Parkside Town Commons.
- Cash provided by financing activities was $41.6 million, compared with cash used of $2.7 million in the prior-year period, reflecting new borrowings partly offset by debt repayments and distributions.
- The $200 million unsecured revolving credit facility matured in June 2014 and had $131.7 million drawn at quarter-end. Based on the unencumbered property pool, approximately $21.1 million was available for additional draws. The Company was in compliance with its debt covenants.
- Common distributions were $0.06 per share for the third quarter. Preferred distributions were $0.515625 per preferred share for the applicable distribution period.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $0.3 million, while nine-month revenue decreased $0.3 million because higher rental income was more than offset by the reduction in construction and service fees.
- Quarterly operating income increased $2.8 million, or approximately 64%; nine-month operating income increased $4.9 million, or approximately 37%.
- Quarterly net income attributable to Kite improved by $3.2 million from a loss to income; year-to-date results improved by $8.0 million, although common shareholders still reported a loss after preferred dividends.
- Interest expense declined $0.4 million in the quarter and $3.0 million year to date, primarily due to the retirement of a $55 million term loan using proceeds from the December 2010 preferred stock issuance.
- General and administrative expense increased 11% in the quarter and 20% year to date, including higher incentive compensation and public-company costs.
- The Company acquired Oleander Point for $3.5 million and Lithia Crossing for $13.3 million, and acquired the remaining 40% interest in The Centre for $2.2 million.
- Debt increased as the Company funded acquisitions, development, redevelopment and joint-venture contributions, while also refinancing portions of variable-rate debt with fixed-rate borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management expected additional leasing opportunities through the remainder of 2011 and into 2012, but noted weak economic growth, slowing employment, consumer-demand risk, tenant bankruptcies and potential rent concessions.
- Delray Marketplace was 66.0% pre-leased or committed, with estimated total costs of $95 million and an expected opening in the fourth quarter of 2012.
- Cobblestone Plaza was 95.6% pre-leased or committed, with estimated costs of $52 million and an expected opening in early 2012. Rivers Edge Phase I was 100% leased, and Oleander Point redevelopment was expected to cost approximately $5 million.
- Six redevelopment projects had estimated total investment of approximately $37 million, of which $19.2 million had been incurred. Two in-process developments had estimated total costs of $147 million, of which $100 million had been incurred.
- Debt maturities over the next 12 months totaled approximately $75.5 million at quarter-end. After extending the Gateway Shopping Center loan, approximately $55.1 million remained scheduled to mature through September 2012. Management stated it was pursuing refinancing, extensions and other funding sources but could not assure successful refinancing on favorable terms.
- Expected additional major tenant improvements and renovation costs over the next 12 months were approximately $7 million to $8 million.
- The Company had completion obligations associated with Eddy Street Commons and expected its portion of certain completion commitments to be approximately $64 million. It also guaranteed $5.8 million of Parkside Town Commons joint-venture debt.
- The limited-service hotel at Eddy Street Commons was sold on November 1, 2011, with related debt repaid; the gain was expected to be recognized in the fourth quarter.
- The Company expected approximately $0.8 million of interest expense to be reclassified from accumulated other comprehensive income over the following 12 months as hedged payments occurred.
- Market risk disclosures indicated that a 100-basis-point increase in interest rates would reduce the fair value of fixed-rate debt by approximately $16.9 million and increase annual cash flow requirements on variable-rate debt by approximately $2.2 million.
- Routine litigation was not expected to have a material adverse effect. Management concluded disclosure controls and procedures were effective, and no material change in internal control over financial reporting was identified.
Investor Verification Checklist
- Verify the refinancing or extension of the approximately $55.1 million of remaining near-term debt maturities and the availability of additional revolving-credit capacity.
- Track leasing, construction costs, financing and opening dates for Delray Marketplace, Cobblestone Plaza, Rivers Edge and Oleander Point.
- Assess whether increased rental income and occupancy can offset higher property operating expenses, real estate taxes, capital requirements and preferred dividends.
- Review tenant credit quality, rent collections, bad-debt expense and exposure to retail-sector weakness or tenant bankruptcies.
- Monitor variable-rate debt, interest-rate hedge maturities and potential changes in interest expense.
- Evaluate completion guarantees, joint-venture debt guarantees and the approximately $64 million Eddy Street Commons completion commitment.
- Confirm the fourth-quarter accounting impact of the Eddy Street Commons hotel sale and related debt repayment.