Kite Realty Group Trust — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2017. 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 quarter-end, the Company owned interests in 117 operating and redevelopment properties totaling approximately 23.1 million square feet, plus one development project under construction. The Parent Company owned approximately 97.7% of the Operating Partnership.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $92.6 million, versus $87.6 million | $182.8 million, versus $176.1 million |
| Operating income | $21.1 million, versus $14.3 million | $29.2 million, versus $32.0 million |
| Operating margin | 22.8%, versus 16.3% | 16.0%, versus 18.1% |
| Net income attributable to common shareholders | $10.2 million, versus a $1.9 million loss | $10.2 million, versus a $0.5 million loss |
| Basic and diluted earnings per share | $0.12, versus $(0.02) | $0.12, versus $(0.01) |
| Funds from operations attributable to common shareholders | $45.1 million, versus $40.6 million | $88.0 million, versus $83.2 million |
| Same-property NOI | $54.5 million, up 3.2% | $110.6 million, up 3.2% |
Revenue growth reflected higher tenant reimbursements, other property-related revenue and rental income. Same-property economic occupancy increased to 93.8% for the quarter and 93.9% for the six-month period, compared with 92.7% and 93.0%, respectively, in the prior-year periods. Annualized base rent per square foot increased to $15.95 from $15.27.
Six-month cash flow from operating activities was $81.1 million, compared with $80.9 million in 2016. Investing activities provided $39.5 million, primarily from $76.1 million of property-sale proceeds, while capital expenditures were $34.9 million. Financing activities used $112.9 million, including $109.9 million of debt repayments and $50.6 million of distributions to common shareholders. Cash and cash equivalents ended at $27.6 million.
Balance Sheet, Debt and Liquidity
- Total assets were $3.55 billion at June 30, 2017, compared with $3.66 billion at December 31, 2016.
- Mortgage and other indebtedness was $1.68 billion, down from $1.73 billion at year-end 2016. Debt had a weighted-average interest rate of 4.01% and a weighted-average maturity of approximately six years.
- Approximately 95% of debt was fixed-rate or effectively fixed-rate through interest-rate hedges; 5% was variable-rate. Interest-rate derivatives had aggregate notional amounts of $460.8 million.
- The unsecured revolving credit facility had $388.2 million available, after borrowings and letters of credit, and the Company had $27.6 million of cash. The Company reported compliance with applicable debt covenants.
- Net debt to annualized adjusted EBITDA was 6.77x based on the Company’s non-GAAP calculation.
- The Board declared a second-quarter distribution of $0.3025 per common share and Common Unit, paid July 13, 2017.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 5.8%, while six-month revenue increased 3.8%.
- Quarterly operating income increased 47.9%, aided by higher revenue and the absence of $2.8 million of prior-year transaction costs. Six-month operating income declined 8.6% because of a $7.4 million impairment charge and higher interest and depreciation expense.
- Net income improved substantially in both periods, primarily because of property-sale gains. Gains on sales of operating properties were $6.3 million in the quarter and $15.2 million year to date, compared with $0.2 million in the prior-year periods.
- Interest expense increased 6.0% for the quarter and 6.7% year to date, primarily due to higher-cost longer-term fixed-rate debt and the commencement of interest expense as development projects became operational.
- Property operating expense as a percentage of revenue increased to 13.1% for the quarter and 13.7% year to date, partly because of higher bad-debt, repair, utility and marketing costs.
- The Company sold four operating properties during the first six months of 2017, generating $76.1 million of net proceeds. The property portfolio decreased from 120 properties and 23.5 million square feet at June 30, 2016.
Outlook, Commentary, Risks and Unusual Items
- Parkside Town Commons Phase II transitioned to the operating portfolio at 95.4% leased. Seven 3-R redevelopment projects were under construction, with estimated aggregate costs of $68.5 million to $74.0 million and expected annualized returns of approximately 8% to 9%.
- The Company estimated $14 million to $16 million of additional major tenant improvements and renovation costs over the next 12 months, plus approximately $2.5 million of remaining costs for its development project under construction.
- An additional $65 million to $85 million of potential redevelopment, repositioning and repurposing opportunities was under evaluation. Management stated that current financing was sufficient for identified projects, primarily through operating cash flow and the revolving facility.
- A joint-venture partner exercised a redemption right for $8.3 million of noncontrolling interests. The Company expected to fund the cash redemption by December 27, 2017.
- The $7.4 million impairment charge was non-cash and related to a property whose intended holding period was shortened. The property’s estimated fair value was $26.0 million using Level 3 inputs.
- Key risks include tenant financial weakness and bankruptcies, retail-sector and online-retail pressures, interest-rate and refinancing risk, access to capital, property-value impairments, development and redevelopment execution, geographic concentration in Florida, Indiana and Texas, environmental liabilities, insurance costs, cybersecurity and maintaining REIT qualification.
- The Company reported no material litigation and no material off-balance-sheet arrangements. Management stated that disclosure controls and internal controls were effective.
- ASU 2017-01 was adopted in the first quarter of 2017. The Company expected future acquisitions of single investment properties generally to have capitalized rather than expensed direct transaction costs. The Company expected to adopt the new revenue standard using the modified retrospective approach and stated that less than 1% of recurring revenue would be affected initially.
Important Facts for Investors to Verify
- Confirm the sustainability of improved occupancy, leasing spreads and same-property NOI after the impact of property dispositions and redevelopment activity.
- Assess whether the 6.77x net debt-to-adjusted-EBITDA ratio and significant debt maturities, including $397.6 million in 2021, remain manageable.
- Evaluate the effect of higher interest expense and future interest-rate movements, including the $0.9 million estimated annual cash-flow sensitivity to a 100-basis-point change on unhedged variable-rate debt.
- Monitor funding requirements for the 3-R program, tenant improvements, the $8.3 million redemption obligation and other redevelopment commitments.
- Separate recurring operating performance from nonrecurring gains on property sales and the 2017 impairment charge when evaluating earnings and dividend coverage.
- Review the Company’s non-GAAP FFO, NOI and adjusted EBITDA definitions and reconcile them with comparable REIT disclosures.