Kite Realty Group Trust — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited combined quarterly report for the three months ended March 31, 2016, covering Kite Realty Group Trust and Kite Realty Group, L.P. The company owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in selected U.S. markets. At quarter-end, it owned interests in 118 operating and redevelopment properties and three development properties under construction. Kite Realty Group Trust owned approximately 97.7% of the Operating Partnership.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $88.6 million | $86.8 million | +$1.7 million |
| Operating income | $17.7 million | $18.5 million | -$0.8 million |
| Consolidated net income | $2.0 million | $7.9 million | -$5.9 million |
| Net income attributable to common shareholders | $1.4 million | $5.1 million | -$3.7 million |
| Basic and diluted EPS | $0.02 | $0.06 | -$0.04 |
| Cash flow from operations | $32.4 million | $45.1 million | -$12.7 million |
| FFO attributable to common shareholders | $42.6 million | $41.3 million | +$1.3 million |
| Adjusted FFO of the Kite Portfolio | $44.1 million | $42.3 million | +$1.8 million |
Revenue increased 2.0%, while operating margin declined to approximately 20.0% from 21.3%. Net margin declined to approximately 2.2% from 9.1%, primarily because Q1 2015 included a $3.4 million gain on property sales and $2.1 million of preferred dividends, while Q1 2016 included higher interest expense and a $0.5 million severance charge. Same-property NOI increased 3.4% to $52.2 million; same-property leased percentage was 95.5% and economic occupancy was 93.7%.
At March 31, 2016, total assets were $3.73 billion, cash and cash equivalents were $23.3 million, and mortgage and other indebtedness was $1.73 billion. Debt had a weighted average interest rate of 3.80% and weighted average maturity of 5.1 years; 84% was fixed-rate or hedged. Company share of net debt was $1.69 billion and net debt to annualized adjusted EBITDA was 7.0x.
Material changes versus the prior comparable period
- Rental income, including tenant reimbursements, increased 1.8%, reflecting 2015 acquisitions, newly operational development projects and improved rents, partly offset by 2015 property dispositions and redevelopment activity.
- Property operating expense decreased 4.2%, but real estate taxes increased 11.1% and depreciation and amortization increased 4.5%.
- Interest expense increased 10.0% to $15.3 million, primarily because of higher-cost longer-term fixed-rate debt and projects becoming operational.
- No operating properties were acquired or sold in Q1 2016. Q1 2015 included $126.5 million of property-sale proceeds and a $3.4 million gain.
- Operating cash flow decreased because of timing of tax-reimbursement collections, semiannual senior-note interest payments and annual insurance payments.
- The quarterly common distribution increased 5.5% to $0.2875 per share and Common Unit, paid April 13, 2016.
Guidance, outlook, risks and unusual items
- Management identified five redevelopment, repositioning and repurpose projects under construction with estimated costs of $34 million to $39 million and targeted incremental returns of approximately 9% to 11%. Potential additional opportunities total approximately $95 million to $110 million.
- Three development projects under construction had estimated total costs of $173.7 million, of which $166.0 million had been incurred; approximately $7.7 million was expected over the following twelve months.
- Management anticipated approximately $13 million to $15 million of additional major tenant improvements and renovation costs over the following twelve months.
- Approximately $232.7 million of secured debt was scheduled to mature before March 31, 2017, including $132.8 million of construction loans. The company was refinancing the Parkside Town Commons and Delray Marketplace construction loans due in November 2016.
- The company reported $377.6 million available under its unsecured revolving credit facility, was in compliance with debt covenants and had unchanged investment-grade corporate credit ratings.
- Interest-rate hedge agreements had $648.3 million of notional amounts. A 100-basis-point change in rates on unhedged variable-rate debt was estimated to change annual cash flow by $2.6 million.
- Key risks include tenant credit and retail-sector conditions, interest rates, refinancing and capital-market access, property values, geographic concentration, development and redevelopment execution, REIT qualification, environmental matters, insurance and cybersecurity. The filing reported no material litigation.
- The company adopted new consolidation and debt-issuance-cost presentation standards in Q1 2016 without a material effect on consolidated results. It was evaluating the future impact of new revenue-recognition and lease-accounting standards.
Most important facts for investors to verify
- Progress and refinancing plans for the $232.7 million of secured debt maturing before March 31, 2017.
- Actual leasing, occupancy and rent performance relative to the reported 95.5% leased rate, 93.7% economic occupancy and 7.8% comparable new-lease rent spread.
- Funding requirements and returns for the $34 million to $39 million redevelopment program and remaining development costs.
- Sustainability of cash flow and distributions given $23.3 million of cash, $1.73 billion of debt and $23.7 million of common distributions paid during the quarter.
- Whether higher interest expense, debt maturities and a 7.0x net-debt-to-annualized-adjusted-EBITDA ratio constrain future growth or capital-market flexibility.