Kite Realty Group Trust — 1Q 2019 Form 10-Q Summary
Business context and reporting period
Kite Realty Group Trust, through Kite Realty Group, L.P., owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in selected U.S. markets. At March 31, 2019, the Company owned interests in 111 operating and redevelopment properties totaling approximately 21.8 million square feet, plus one development project under construction. The Parent Company owned approximately 97.5% of the Operating Partnership. Results cover the three months ended March 31, 2019, compared with the three months ended March 31, 2018; financial statements are unaudited.
Key financial metrics
| Metric | 1Q 2019 | 1Q 2018 | Change |
|---|---|---|---|
| Total revenue | $83.5 million | $89.8 million | Down $6.2 million |
| Operating income (loss) | $23.0 million | $(1.5) million | Improved $24.5 million |
| Net income (loss) | $6.0 million | $(18.0) million | Improved $24.0 million |
| Net income (loss) attributable to common shareholders | $5.7 million | $(17.9) million | Improved $23.6 million |
| Basic and diluted EPS | $0.07 | $(0.21) | Improved $0.28 |
| Funds from operations attributable to common shareholders | $37.3 million | $42.5 million | Down $5.2 million |
| Cash provided by operating activities | $32.3 million | $36.3 million | Down $4.0 million |
| Same-property NOI | $55.1 million | $54.1 million | Up 1.8% |
Operating margin was approximately 27.5% in 1Q 2019 versus negative 1.7% in 1Q 2018. Net margin attributable to common shareholders was approximately 6.8% versus negative 20.0%. The improvement primarily reflects substantially lower impairment charges and higher gains on property sales, partially offset by lower revenue.
At March 31, 2019, total assets were $3.20 billion, mortgage and other indebtedness was $1.60 billion, and shareholders’ equity was $1.39 billion. Cash and cash equivalents were $28.4 million; cash, cash equivalents and restricted cash totaled $52.0 million. Net debt to annualized adjusted EBITDA was 6.9x.
Debt had a weighted-average interest rate of 4.11% and weighted-average maturity of 5.5 years. Approximately 91% of debt was fixed-rate or effectively fixed through hedges, with $391.2 million of interest-rate derivatives. The Company reported $421.2 million of availability under its revolving credit facility and was in compliance with applicable debt covenants. A 100-basis-point change in rates on unhedged variable-rate debt would affect annual cash flow by approximately $1.3 million.
Investing activities used $29.7 million, including $29.3 million for the acquisition of the Pan Am Plaza Garage and $11.5 million of capital expenditures, partly offset by $13.1 million of property-sale proceeds. Financing activities provided $3.8 million, including $60.0 million of new borrowings and $54.7 million of distributions to common shareholders and Common Unit holders. The quarterly distribution was $0.3175 per share and unit.
Material changes versus the prior comparable period
- Revenue declined 7.0%, primarily because of property dispositions and lower fee income. Rental income declined 6.0%, while other property-related revenue increased due partly to the Pan Am Plaza Garage acquisition.
- Impairment charges decreased to $4.1 million from $24.1 million in the prior-year quarter. The 2019 charge was a non-cash impairment based on an estimated property fair value of $10.0 million.
- The Company recognized a $6.6 million gain on the sale of Whitehall Pike, compared with a $0.5 million gain on 2018 property sales.
- Property operating expenses decreased 8.3% and depreciation and amortization decreased 10.2%; general and administrative expense increased 14.0%, partly because the new lease standard required certain costs to be expensed rather than capitalized.
- Same-property NOI increased 1.8%, supported by higher rental rates, improved expense recoveries and small-shop leasing, but economic occupancy declined to 92.2% from 93.2% because of anchor vacancies. Period-end leased percentage increased to 95.0% from 94.7%.
- The Company executed 95 new and renewal leases covering 642,105 square feet. Comparable new leases generated a 5.6% blended rent spread, and six anchor leases were executed.
- On January 1, 2019, the Company adopted the new lease accounting standard. It recorded a $27.0 million right-of-use asset and a $27.3 million lease liability for ground leases and recognized $1.2 million of incremental expense in the quarter.
Outlook, management commentary, risks and unusual items
The Company announced a plan to market and sell up to $500 million of non-core assets to improve portfolio quality, reduce leverage and focus on markets where it can achieve scale. During and after the quarter, it sold five properties for $134.8 million and had additional properties under contract, under negotiation or being marketed that could generate $400 million to $450 million of proceeds. Subsequent to March 31, 2019, four properties were sold for cumulative proceeds of $121.3 million, with proceeds used to repay debt. Management expected aggregate gains of approximately $13.6 million in the second quarter related to those sales.
No formal earnings or FFO guidance is provided in the filing. Management expected to fund development, redevelopment and other near-term needs through operating cash flow, property dispositions and borrowings under the revolving facility. Expected spending over the next 12 months included approximately $14 million to $16 million for major tenant improvements and $25 million to $35 million to release vacant anchor space. The Company estimated $4.8 million of remaining costs for its development project and $3.5 million to $4.5 million for its redevelopment project.
Key risks include tenant financial health and bankruptcies, anchor vacancies, retail-sector and e-commerce pressures, economic and real estate market conditions, interest-rate volatility, refinancing and liquidity risk, property impairment, acquisition and disposition execution, geographic concentration in Florida, Indiana and Texas, environmental and insurance risks, cybersecurity, and maintaining REIT qualification. The Company guaranteed debt of certain joint ventures, including its $11.7 million share of an Embassy Suites construction loan, and guaranteed debt of consolidated variable-interest entities. Management reported no material litigation and stated that no material off-balance-sheet arrangements existed.
Important facts for investors to verify
- Reconcile the effect of the non-core asset sales on leverage, recurring rental revenue, FFO and future portfolio composition.
- Monitor the 6.9x net debt-to-annualized-adjusted-EBITDA ratio, debt maturities, revolving-facility availability and covenant compliance.
- Assess whether the decline in economic occupancy and anchor vacancies persists despite positive leasing spreads and higher same-property NOI.
- Verify the timing and realized gains from the subsequent property sales and the extent to which proceeds reduce outstanding debt.
- Evaluate recurring cash flow after distributions, tenant improvements, anchor-space releasing costs, development and redevelopment spending.
- Review the $4.1 million impairment and the sensitivity of property valuations to market rents, occupancy, capitalization rates and exit assumptions.
- Consider the distinction between GAAP net income, FFO, adjusted EBITDA and cash flow from operations when assessing dividend coverage and operating performance.