Kite Realty Group Trust — Q2 2013 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2013. Kite Realty Group Trust, through Kite Realty Group, L.P., owns, operates, leases, acquires, redevelops and develops neighborhood and community shopping centers and related commercial properties in selected U.S. markets. At quarter-end, the Company owned interests in 63 properties, including 57 retail operating properties, four retail properties under redevelopment and two commercial operating properties, plus four development properties under construction.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $31.0 million, versus $24.2 million | $63.1 million, versus $49.0 million |
| Operating income | $0.6 million, versus $5.0 million | $9.8 million, versus $9.5 million |
| Net loss attributable to common shareholders | $8.7 million, or $0.10 per share | $8.8 million, or $0.10 per share |
| Funds from operations allocable to the Company | $9.4 million, versus $6.7 million | $19.9 million, versus $12.6 million |
| Adjusted FFO of the Kite Portfolio | $10.1 million, versus $8.0 million | $21.7 million, versus $15.9 million |
| Cash flow from operating activities | Not separately reported | $25.0 million, versus $11.2 million |
Revenue increased primarily from acquisitions, newly operational development properties, improved occupancy and tenant recoveries, and higher land-sale gains. Same-property NOI increased 4.4% for the quarter and 4.8% year to date. Same-property leased occupancy was 95.1%, compared with 92.8% in the prior-year periods; the retail operating portfolio was 95.4% leased at quarter-end, compared with 93.0% a year earlier.
Quarterly operating income was pressured by a $5.4 million impairment charge, higher depreciation and amortization, and increased interest expense. The Company reported a consolidated net loss of $7.3 million for the quarter and $5.2 million for the first six months, compared with a $0.9 million quarterly loss and $2.8 million first-half profit in 2012. Prior-year results included $6.0 million of income from discontinued operations, including property-sale gains.
Balance sheet, debt and liquidity
| Balance-sheet item | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $1.413 billion | $1.289 billion |
| Net real estate investments | $1.315 billion | $1.200 billion |
| Mortgage and other indebtedness | $747.5 million | $699.9 million |
| Cash and cash equivalents | $13.1 million | $12.5 million |
| Total equity | $558.0 million | $476.6 million |
- Total debt had a weighted-average maturity of 4.1 years and a weighted-average interest rate of 4.26%.
- Considering hedges, 73% of debt was effectively fixed-rate and 27% was variable-rate.
- The $200 million unsecured revolving facility had $107.6 million outstanding and approximately $88 million available; availability would have been approximately $110 million if the expansion feature were exercised. Letters of credit totaled $4.2 million.
- The Company was in compliance with the revolving facility and term-loan covenants at June 30, 2013.
- Near-term debt maturities, excluding scheduled principal payments and the Kedron Village note, totaled approximately $40.8 million over the following 12 months.
Financing activities generated $129.7 million during the first six months, including $97.2 million of net common-equity proceeds and $135.8 million of loan borrowings, partly offset by $88.1 million of debt repayments and shareholder distributions. Investing activities used $154.1 million, primarily for $87.0 million of acquisitions and $53.4 million of capital expenditures.
Material changes versus the prior comparable period
- Second-quarter revenue increased 28.2%, while first-half revenue increased 28.8%, primarily due to acquisitions, development activity and higher other property-related revenue.
- Same-property NOI increased 4.4% in the quarter and 4.8% for the first half.
- Net loss attributable to common shareholders increased from $2.7 million to $8.7 million in the quarter and from $2.7 million to $8.8 million for the first half.
- The Company acquired Shoppes of Eastwood for $11.6 million, Cool Springs Market for $37.6 million and Castleton Crossing for $39.0 million during the first half.
- The Company issued 15.525 million common shares at $6.55 per share, generating approximately $97.2 million of net proceeds. The proceeds initially repaid approximately $74.2 million of revolving debt and were largely redeployed to acquisitions.
- Total debt increased $47.6 million from year-end, while net real estate investments increased $115.1 million.
- The revolving credit facility was amended to extend its maturity to February 2017, reduce pricing to LIBOR plus 165 to 250 basis points, and increase the potential expansion feature to $400 million, subject to conditions.
Guidance, outlook, risks and unusual items
- Management expected to incur approximately $13 million to $15 million of additional major tenant improvements and renovation costs over the next 12 months.
- Six development or redevelopment projects under construction had an estimated total cost of approximately $301 million, with $214 million incurred and approximately $87 million expected over the following 18 months.
- Holly Springs Towne Center Phase II was undergoing pre-leasing and financing discussions; estimated total cost was approximately $44 million, with $16 million incurred. The Company was not contractually obligated to complete the project.
- Kedron Village was in payment default on a $29.5 million non-recourse loan. The Company recorded a $5.4 million impairment charge at June 30, 2013. On July 2, 2013, the lender completed foreclosure and took title in full satisfaction of the debt; management expected a third-quarter non-cash gain of approximately $1.5 million and reversal of approximately $1.1 million of accrued unpaid interest.
- The Company expected interest expense to increase by approximately $3.2 million over the next 12 months as hedged forecasted interest payments occurred.
- Eddy Street Commons completion obligations included an expected remaining investment of not more than $35 million, subject to potential reduction through a joint-venture partner. Certain delay-related fees were capped at $1 million.
- Principal risks include tenant credit and bankruptcies, economic and retail-market weakness, refinancing and liquidity availability, interest-rate volatility, development and redevelopment execution, property impairments, geographic concentration and continued REIT qualification.
- Management stated that no material litigation was pending or threatened beyond ordinary-course matters and that disclosure controls were effective.
Most important facts for an investor to verify
- Reconcile the common-share offering amount: the financial statements and notes state 15.525 million shares, while one MD&A passage states 15.250 million.
- Assess refinancing plans for approximately $40.8 million of near-term maturities and the Company’s ability to fund $87 million of remaining development costs.
- Evaluate the effect of the Kedron Village foreclosure, including the expected third-quarter accounting gain, interest reversal and discontinued-operations classification.
- Review tenant concentration, leasing momentum, occupancy and recovery ratios supporting the reported same-property NOI growth.
- Monitor leverage, covenant compliance, available revolver capacity and exposure to variable interest rates; a 100-basis-point rate increase was estimated to change annual cash flow by approximately $2.1 million.
- Confirm the sustainability of common and preferred distributions relative to operating cash flow, FFO and required capital expenditures.