KITE REALTY GROUP TRUST quarterly report, Q3 FY2019

Kite Realty Group Trust — Form 10-Q Summary

Business context and reporting period

Quarterly report for the three and nine months ended September 30, 2019. 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 96 operating and redevelopment properties totaling approximately 18.1 million square feet and had one development project under construction. The Parent Company owned approximately 97.5% of the Operating Partnership.

Financial performance and key metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Total revenue	$74.9 million	$85.7 million	$239.9 million	$267.2 million
Net income attributable to common shareholders	$(19.7) million	$3.9 million	$(15.8) million	$(15.3) million
Net loss per common share	$(0.24)	$0.05	$(0.19)	$(0.18)
Operating income	$1.3 million	$20.7 million	$41.6 million	$35.0 million
Funds from operations attributable to common shareholders	$25.6 million	$40.1 million	$96.3 million	$127.2 million
Adjusted FFO of Operating Partnership	$33.3 million	$41.1 million	$108.3 million	$130.3 million

Q3 GAAP operating margin was approximately 1.8%, compared with 24.2% in the prior-year quarter. The nine-month operating margin was approximately 17.3%, compared with 13.1% in the prior-year period. Same-property NOI increased 2.3% in both the quarter and year-to-date period. Same-property leased occupancy was 95.3%, while economic occupancy was 92.2% in the quarter.

Q3 rental income declined 13.1% to $72.6 million, primarily because of property dispositions; nine-month rental income declined 8.6% to $234.7 million.
Q3 general and administrative expense increased 37.9% to $6.7 million, partly because certain lease-related costs were expensed following adoption of the new leasing standard.
Q3 included an $8.5 million impairment charge, a $5.7 million loss on property sales and a $7.0 million loss on debt extinguishment.
Nine-month impairment charges were $37.7 million, compared with $38.8 million in 2018. Nine-month gains on property sales were $25.0 million, compared with $8.3 million in 2018.

Cash flow, balance sheet, debt and liquidity

Cash provided by operating activities was $106.2 million for the nine months, compared with $119.0 million in 2018.
Cash provided by investing activities was $363.8 million, including $460.7 million of net property-sale proceeds, partially offset by $58.2 million of property acquisitions and $37.6 million of capital expenditures.
Cash used in financing activities was $465.5 million, including $418.3 million of debt repayments and $109.6 million of distributions to common shareholders and Common Unit holders.
Cash, cash equivalents and restricted cash totaled $50.0 million at September 30, 2019, including $40.4 million of cash and cash equivalents.
Mortgage and other indebtedness was $1.199 billion, down from $1.543 billion at December 31, 2018. Approximately 95% of debt was fixed-rate or effectively fixed-rate, with a weighted-average interest rate of 4.03% and weighted-average maturity of 5.9 years.
The $600 million unsecured revolving credit facility had no outstanding balance, $2.0 million of letters of credit outstanding and approximately $580.0 million available borrowing capacity. The company was in compliance with applicable debt covenants.
Net debt to annualized adjusted EBITDA was 6.0x under the company’s non-GAAP calculation.
The company declared and paid a quarterly distribution of $0.3175 per common share and Common Unit.

Material changes versus the prior comparable period

The portfolio was reduced from 115 properties and 22.4 million square feet at September 30, 2018 to 96 properties and 18.1 million square feet at September 30, 2019, reflecting the company’s capital-recycling program.
During the first nine months of 2019, the company sold 17 operating properties for net proceeds of $460.7 million and used sale proceeds primarily to repay debt.
The company acquired the Pan Am Plaza Garage for $29.5 million and Nora Plaza for $29.0 million.
Q3 net income shifted from $4.3 million of consolidated net income in 2018 to a $20.1 million consolidated net loss in 2019, driven principally by the impairment charge, property-sale loss and debt-extinguishment loss.
Despite portfolio dispositions, same-property NOI increased 2.3%, supported by contractual rent increases and improved expense recoveries, partly offset by anchor vacancies.
The company adopted the new lease accounting standard on January 1, 2019, recording a $27.0 million right-of-use asset and a $27.3 million operating lease liability for ground leases. The adoption also increased expense for certain lease-related costs.

Guidance, outlook, management commentary, risks and unusual items

No formal earnings or financial guidance is provided in the filing. Management stated that the asset-sale program was intended to improve portfolio quality, reduce leverage and focus on markets where the company can achieve scale and attractive risk-adjusted returns. As of October 2019, the program had generated approximately $502 million of proceeds from the sale of 20 properties.

The company expected to spend approximately $20 million to $25 million over the following 12 months to release vacant anchor space. It also expected approximately $4.0 million of remaining costs on its development project over the following 12 to 18 months.
Subsequent to quarter-end, three properties were sold for cumulative proceeds of $31.6 million. The company expected to recognize approximately $10 million of aggregate gains in the fourth quarter of 2019, with proceeds used to repay debt.
Key risks include tenant financial health and bankruptcies, retail-sector and online-retail pressures, economic and real estate market conditions, interest rates, refinancing and liquidity, property impairments, acquisition and disposition execution, geographic concentration, REIT qualification, environmental matters, insurance, cybersecurity and development or redevelopment costs.
The company guarantees certain joint-venture debt, including its $11.8 million share of a $33.6 million outstanding Embassy Suites construction loan. It also guarantees $56.0 million of debt at two consolidated variable-interest entities.
Management reported no material litigation and stated that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.

Important facts for investors to verify

Whether continued property dispositions will reduce recurring rental income faster than debt reduction improves interest expense and leverage.
The sustainability of same-property NOI growth amid anchor vacancies and the company’s planned $20 million to $25 million anchor-releasing investment.
Debt maturities, refinancing requirements and compliance with credit facility, term-loan and senior-note covenants.
The assumptions supporting the $37.7 million of year-to-date impairment charges and the expected $10 million of subsequent property-sale gains.
Tenant credit quality, occupancy and rent collection trends, particularly in the company’s concentrated Florida, Indiana and Texas markets.
The comparability and calculation methodology of non-GAAP measures, including NOI, FFO, adjusted FFO, adjusted EBITDA and net debt to adjusted EBITDA.