KRG

Business Context and Reporting Period

Kite Realty Group Trust (KRG) is a Maryland real estate investment trust (REIT) and vertically integrated real estate company focused on the development, acquisition, and operation of neighborhood and community shopping centers. The reporting period covers the fiscal year ended December 31, 2005. As of year-end, the Company owned interests in 40 retail operating properties (approximately 6.2 million square feet) and 14 retail development properties (approximately 1.8 million square feet projected).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 242% to $99.4 million, driven by a 130% increase in rental income ($66.9 million) due to acquisitions and new developments, and an 81% increase in construction and service fees ($26.4 million).
• Profitability: The Company returned to profitability with Net Income of $13.4 million, compared to a net loss of $0.5 million in 2004. This improvement was aided by a $7.2 million gain on the sale of the Mid-America Clinical Labs property.
• Debt Levels: Total indebtedness rose to $375.2 million from $283.5 million. However, the Company utilized $133.2 million in net proceeds from an October 2005 equity offering to pay down approximately $112.9 million of outstanding debt, improving its balance sheet.
• Portfolio Expansion: The Company acquired five operating properties in 2005 (including Fox Lake Crossing, Plaza Volente, and Market Street Village) and added ten parcels to its development pipeline.

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to focus on internal growth and targeted acquisitions of neighborhood and community shopping centers. The Company maintains a significant development pipeline with 14 projects expected to cost approximately $176.4 million total, of which $107.7 million had been incurred by year-end. The Company expects to meet short-term liquidity needs through operating cash flows and its revolving credit facility, while long-term needs will be met through borrowings, equity sales, or property dispositions.

Key Risks and Contingencies:

• Tenant Bankruptcy: Winn-Dixie Stores, Inc. (1.4% of annualized base rent) filed for Chapter 11 bankruptcy in February 2005. While it continued to pay rent through March 2006, it announced plans to close one of its two locations in the Company's portfolio (Shops at Eagle Creek).
• Glendale Mall: The Company's largest property by square footage (4.2% of base rent) was 81% leased as of year-end. Management is evaluating strategic alternatives, including redevelopment or sale, which could impact revenue.
• Interest Rate Risk: Approximately 28% of consolidated indebtedness is variable rate. A 100 basis point increase in rates would decrease annual cash flow by approximately $1.0 million.
• REIT Status: Failure to qualify as a REIT would subject the Company to corporate income tax, significantly reducing earnings available for distribution.

Investor Verification Checklist

• Winn-Dixie Lease Status: Verify the final outcome of the lease rejection at Shops at Eagle Creek and the impact on cash flow.
• Glendale Mall Strategy: Confirm the decision regarding redevelopment or sale and the associated capital requirements or proceeds.
• Debt Refinancing: Monitor the refinancing of the Sunland Towne Center mortgage (refinanced in Jan 2006 to a bridge loan) and other maturing debt.
• Development Pipeline Costs: Track actual costs versus the estimated $176.4 million total project cost for the 14 development properties.
• Equity Dilution: Assess the impact of the 8.3 million Operating Partnership units that became redeemable for cash or common shares starting August 2005.