Kite Realty Group Trust — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2016. Kite Realty Group Trust operates through Kite Realty Group, L.P. and owns, operates, acquires, develops and redevelops neighborhood and community shopping centers in selected U.S. markets. At June 30, 2016, the Company owned interests in 120 operating and redevelopment properties and one development property under construction. The Parent Company owned approximately 97.7% of the Operating Partnership.
Financial performance and condition
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $87.6 million | $83.7 million | $176.1 million | $170.6 million |
| Operating income | $14.3 million | $16.1 million | $32.0 million | $34.6 million |
| Operating margin | 16.3% | 19.2% | 18.1% | 20.3% |
| Net income attributable to common shareholders | $(1.9) million | $4.6 million | $(0.5) million | $9.7 million |
| Net income per common share | $(0.02) | $0.06 | $(0.01) | $0.12 |
| Funds from operations attributable to common shareholders | $40.6 million | $44.9 million | $83.2 million | $86.2 million |
| Adjusted FFO of the Kite Portfolio | $44.2 million | $41.6 million | $88.2 million | $83.9 million |
Revenue increased 4.6% in the second quarter and 3.3% for the six-month period, primarily from 2015 property acquisitions, newly operational development properties, higher rents and improved occupancy. Property operating expense ratios improved to 13.0% from 14.1% in the quarter and to 13.4% from 14.4% year to date. Same-property NOI increased 2.6% in the quarter and 3.0% year to date.
Reported earnings declined because of higher depreciation and amortization, higher interest expense, $2.8 million of terminated transaction costs, and the absence of the $4.5 million settlement gain recorded in 2015. The Company also recorded a $0.5 million severance charge in the first quarter of 2016. Comprehensive loss attributable to the Parent Company was $4.5 million for the quarter and $10.2 million year to date, principally reflecting changes in derivative fair values.
Net cash provided by operating activities was $80.9 million for the six months ended June 30, 2016, compared with $85.8 million in the prior-year period. Capital expenditures were $44.2 million, and cash used in investing activities was $44.8 million. Cash used in financing activities was $32.1 million, including $46.7 million of common shareholder distributions. Cash and cash equivalents were $37.9 million at June 30, 2016.
Debt, liquidity and capital resources
- Mortgage and other indebtedness totaled $1.740 billion at June 30, 2016, compared with $1.724 billion at December 31, 2015.
- Debt had a weighted-average interest rate of 3.89% and weighted-average maturity of approximately five years; 91% was fixed-rate or effectively fixed-rate debt.
- The Company had no borrowings outstanding under its $500 million unsecured revolving credit facility and reported $370.9 million of availability, subject to borrowing-base and covenant limitations.
- Interest-rate hedge agreements had aggregate notional amounts of $648.3 million and a fair-value liability of $14.2 million.
- Company share of net debt was $1.671 billion, annualized adjusted EBITDA was $241.8 million, and net debt to EBITDA was 6.9x.
- Approximately $218.7 million of secured debt was scheduled to mature before June 30, 2017, including construction loans expected to be refinanced. The Company stated that it was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Revenue rose, but operating income declined 7.6% in the quarter and 7.6% year to date as expense growth, depreciation and interest costs exceeded revenue growth.
- Interest expense increased 17.6% in the quarter and 13.7% year to date, primarily due to higher-cost longer-term fixed-rate debt and projects becoming operational.
- Common-shareholder earnings changed from income of $4.6 million to a loss of $1.9 million in the quarter and from income of $9.7 million to a loss of $0.5 million year to date.
- FFO attributable to common shareholders declined 9.6% in the quarter and 3.5% year to date, while adjusted FFO increased because the prior-year settlement gain was excluded and current-period transaction costs were added back.
- Investment activity shifted toward development and redevelopment: there were no property acquisitions in the first six months of 2016, compared with $94.2 million of acquisition cash outflows in the prior-year period.
- The Company completed or transitioned Tamiami Crossing and Holly Springs Towne Center—Phase II into the operating portfolio. Tamiami Crossing reached 100% occupancy after the remaining anchor opened in July 2016.
Outlook, commentary, risks and unusual items
Management identified approximately $90 million to $110 million of potential redevelopment, repositioning and repurposing opportunities, with targeted incremental returns of approximately 9% to 11%. Eight such projects were in process, with estimated aggregate costs of $40.5 million to $47.0 million. One development project under construction had an estimated total cost of $83.5 million, of which $80.1 million had been incurred by June 30, 2016.
Management expected approximately $9 million to $11 million of additional major tenant improvements and renovation costs over the following twelve months, excluding the 3-R initiative. No formal earnings or revenue guidance was provided in the filing.
On July 28, 2016, subsequent to quarter-end, the Company amended and restated its credit agreement. The transaction extended the revolving facility maturity to July 28, 2020, extended $200 million of term debt to July 28, 2021, reduced certain interest-rate margins and improved the leverage-ratio calculation.
Key risks include tenant credit and bankruptcy risk, retail-market and economic conditions, interest-rate volatility, refinancing and liquidity risk, property impairment, development and redevelopment execution, geographic concentration in Florida, Indiana and Texas, environmental and insurance exposure, cybersecurity, and maintaining REIT qualification. The Company reported no material litigation and stated that its disclosure controls were effective.
Investor verification checklist
- Verify the refinancing and maturity profile of the $218.7 million of secured debt scheduled to mature before June 30, 2017.
- Assess whether same-property NOI growth, occupancy and leasing spreads can offset elevated interest, depreciation and redevelopment costs.
- Review leverage of 6.9x net debt to annualized adjusted EBITDA and available revolver capacity under the amended credit agreement.
- Evaluate funding requirements and expected returns for the $40.5 million to $47.0 million 3-R projects and the remaining development costs.
- Distinguish recurring operating performance from unusual items, including terminated transaction costs, the 2015 settlement gain, severance, asset sales and derivative valuation changes.
- Confirm the Company’s ability to fund distributions, capital expenditures and tenant improvements while maintaining REIT status and debt-covenant compliance.