Kite Realty Group Trust — Q1 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with the same period in 2012. Kite Realty owns, operates, leases, acquires, redevelops and develops neighborhood and community shopping centers and selected commercial properties. At March 31, 2013, it owned interests in 61 properties, including 55 retail operating properties, four retail properties under redevelopment and two commercial operating properties, plus three in-process retail development properties.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $32.1 million | $24.8 million | +$7.3 million, 29.4% |
| Operating income | $9.1 million | $4.5 million | +$4.6 million |
| Operating margin | 28.4% | 18.2% | Improved |
| Income from continuing operations | $2.1 million | $(1.9) million | Improved by $4.0 million |
| Net income attributable to Kite | $2.0 million | $1.5 million | +$0.5 million |
| Net loss attributable to common shareholders | $(0.1) million | $(0.03) million | Common shareholders remained at a loss |
| FFO allocable to the Company | $10.6 million | $5.9 million | +$4.7 million |
| Adjusted FFO of the Kite Portfolio | $11.6 million | $7.9 million | +$3.7 million |
| Cash flow from operating activities | $12.7 million | $5.5 million | +$7.2 million |
| Capital expenditures and investing outflows | $(49.6) million | $18.3 million inflow | Shifted to development and acquisitions |
Revenue growth was driven by higher minimum rent, tenant reimbursements and other property-related revenue, including higher land-sale gains. Same-property NOI increased 5.2% to $15.1 million, while same-property leased percentage improved to 94.2% from 93.1%. The retail operating portfolio was 94.5% leased at quarter-end, compared with 93.4% a year earlier.
At March 31, 2013, total assets were $1.33 billion, including $1.24 billion of net real estate investments. Cash and cash equivalents were $14.6 million, of which $4.8 million was held for a tax-qualified asset exchange. Total debt was $746.9 million, with a weighted-average interest rate of 4.31% and weighted-average maturity of 4.4 years. After hedging, approximately 74% of debt was effectively fixed-rate and 26% variable-rate.
Material changes versus the prior comparable period
- Minimum rent increased 15.7%, and tenant reimbursements increased 11.8%, primarily due to acquisitions, newly operational development properties, improved occupancy and recoveries.
- Other property-related revenue increased to $5.0 million from $1.2 million, primarily due to approximately $4.1 million of higher land-sale gains, partly offset by lower event-related income.
- Operating income improved despite higher property operating costs, general and administrative expenses, acquisition costs and depreciation. Depreciation and amortization increased 28.5% to $11.8 million.
- Interest expense increased 11.8% to $7.1 million, including default interest and a deferred financing cost write-off.
- Q1 2012 included $5.6 million of discontinued-operation income, including a $5.2 million property-sale gain; no comparable discontinued-operation income occurred in Q1 2013.
- Q1 2012 included a $1.3 million litigation charge that did not recur in Q1 2013.
- Operating cash flow increased, but investing cash flow shifted substantially negative because of $11.4 million of acquisition spending and $32.7 million of capital expenditures.
Liquidity, debt and capital resources
- The amended $200 million unsecured revolving credit facility was extended to February 2017, with a potential one-year extension, lower pricing of LIBOR plus 165 to 250 basis points and an expansion feature up to $400 million, subject to conditions.
- At quarter-end, $112.2 million was outstanding on the revolving facility and $125.0 million on the unsecured term loan. Total borrowing capacity under the facility and term loan was $292.5 million, leaving approximately $51 million available for future draws. Letters of credit totaled $4.2 million.
- The Company was in compliance with applicable credit facility and term-loan covenants at March 31, 2013.
- Approximately $48.7 million of property-level debt, excluding scheduled principal payments, was scheduled to mature during the following 12 months. Management expected to repay, refinance or extend these maturities using financing sources, the revolving facility, capital markets or asset sales.
- Cash flows from financing activities were $39.2 million, reflecting $48.8 million of borrowings, $1.7 million of repayments and distributions of approximately $7.2 million to common, preferred and noncontrolling holders.
- In April 2013, the Company issued 13.5 million common shares for net proceeds of approximately $84.6 million. It initially used $62.2 million to repay revolving debt and subsequently redeployed most proceeds toward two acquisitions.
Guidance, outlook, commentary and risks
Management did not provide formal earnings guidance in the filing. Management expected continued leasing opportunities in 2013 but highlighted uncertainty from weak economic growth, soft consumer demand, tenant bankruptcies, reduced retail-space demand, rent concessions, collection challenges and possible lease terminations.
- Six in-process development or redevelopment projects had estimated total costs of approximately $244 million, with approximately $50 million remaining to be incurred over the next 12 months.
- Management anticipated approximately $13 million to $15 million of additional major tenant improvements and renovation costs over the next 12 months.
- Delray Marketplace was 84.4% leased or committed and 65.6% occupied at March 31, 2013; Holly Springs Towne Center Phase I was 85.6% leased or committed and 49.9% occupied; Four Corner Square was 87.1% leased or committed and 64.4% occupied.
- A wholly owned subsidiary was in payment default on a $29.5 million non-recourse loan because the related property did not generate sufficient cash flow for debt service. Default interest was 4.00% above the stated 5.70% rate, the lender could call the principal, and no formal waiver had been provided. Management was negotiating with the special servicer. The filing states that no cross-default was triggered.
- The Company had completion guarantees and development obligations, including an expected remaining obligation of no more than $35 million for Eddy Street Commons. Exposure to certain delay fees was capped at $1 million.
- Interest-rate hedges covered approximately $214.3 million of variable-rate debt. Management expected $3.2 million of additional interest expense over the next 12 months as hedged forecasted interest payments occurred.
- Key risks include refinancing and liquidity risk, interest-rate volatility, tenant credit and bankruptcy risk, development and redevelopment execution, property values, geographic concentration, environmental liabilities and maintaining REIT status.
Most important facts for investors to verify
- Resolution, refinancing or potential acceleration of the $29.5 million loan in payment default.
- Availability under the revolving credit facility after the April equity offering, acquisitions and project funding.
- Execution and remaining funding requirements for the development and redevelopment pipeline.
- Lease-up and occupancy progress at Delray Marketplace, Holly Springs Towne Center and Four Corner Square.
- Near-term refinancing or repayment of approximately $48.7 million of property-level debt maturities.
- Effect of the April 2013 equity issuance and subsequent Cool Springs Market and Castleton Crossing acquisitions on leverage, share dilution and cash flow.
- Reconciliation of reported GAAP earnings to FFO and adjusted FFO, including the treatment of nonrecurring land-sale gains, litigation charges and financing-cost amortization.