Kite Realty Group Trust — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2018. 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 115 properties totaling approximately 22.4 million square feet, including 112 consolidated properties and one development project under construction. The Parent Company owned approximately 97.6% of the Operating Partnership.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $85.7 million | $87.1 million | $267.2 million | $269.9 million |
| Operating income | $20.7 million | $16.2 million | $26.6 million | $45.4 million |
| Net income attributable to common shareholders | $3.9 million | $(0.6) million | $(15.3) million | $9.6 million |
| EPS | $0.05 | $(0.01) | $(0.18) | $0.11 |
| Cash flow from operations | Not separately provided | Not separately provided | $119.0 million | $123.8 million |
| FFO attributable to common shareholders | $40.1 million | $40.9 million | $127.2 million | $128.9 million |
Q3 operating margin was approximately 24.2%, compared with 18.6% in the prior-year quarter. Nine-month operating margin was approximately 10.0%, compared with 16.8% in 2017. Q3 net margin attributable to common shareholders was approximately 4.6%, compared with negative 0.7% in the prior-year quarter; nine-month net margin was negative 5.7%, compared with 3.5% in 2017.
Same-property NOI increased 1.5% in both the quarter and nine-month period. Same-property leased percentage was 93.9% at quarter-end versus 94.4% in the prior-year period, and economic occupancy was 92.3% versus 93.0%.
At September 30, 2018, total assets were $3.29 billion, cash and cash equivalents were $30.7 million, and cash, cash equivalents, and restricted cash totaled $41.0 million. Mortgage and other indebtedness was $1.58 billion, or approximately 48% of total assets. Debt was 90% fixed-rate or effectively fixed-rate, with a weighted average interest rate of 4.10% and weighted average maturity of five years. The Company had $436.6 million available under its revolving credit facility and was in compliance with applicable debt covenants.
Cash flow from investing activities was $103.6 million, driven primarily by $161.5 million of property-sale proceeds, while capital expenditures were $47.3 million. Financing activities used $213.8 million, including $245.0 million of loan repayments and $82.6 million of distributions to common shareholders and Common Unit holders.
Material changes versus prior comparable periods
- Q3 revenue declined $1.4 million, or approximately 1.6%, primarily because of property dispositions; fee income and other property-related revenue partially offset the decline.
- Q3 operating income increased $4.5 million as depreciation and amortization declined $5.9 million and general and administrative expense declined $0.6 million, despite lower revenue and modestly higher property operating costs and real estate taxes.
- Nine-month operating income declined $18.8 million, primarily because of $38.8 million of impairment charges, compared with $7.4 million in 2017.
- Nine-month net loss attributable to common shareholders was $15.3 million, compared with $9.6 million of net income in 2017. Gains on property sales also decreased to $8.3 million from $15.2 million.
- FFO attributable to common shareholders decreased modestly to $127.2 million from $128.9 million.
- The Company sold two properties and contributed three properties to a TH Real Estate joint venture. The contribution generated $89.0 million of net proceeds, a $7.8 million gain, and a retained 20% ownership interest.
- The Company recorded $38.8 million of non-cash impairment charges related to changes in expected holding periods for certain properties.
Guidance, outlook, risks, and unusual items
The filing does not provide formal earnings or same-property NOI guidance. Management stated that it expects to fund ongoing development, redevelopment, tenant improvement, and other capital needs primarily through operating cash flow, property dispositions, and borrowings under the revolving credit facility.
- Three 3-R projects were under construction with estimated aggregate costs of $24.5 million to $27.5 million and estimated annualized returns of approximately 9% to 10%. Additional 3-R opportunities were estimated at $40 million to $56 million.
- Additional major tenant improvements and renovation costs were estimated at approximately $14 million to $20 million over the following 12 months.
- The Company had an obligation to fund the remaining $12.0 million redemption of a joint venture partner’s interest before November 8, 2018.
- As a subsequent event, on October 25, 2018 the Operating Partnership borrowed $250 million under a new term loan facility and used $200.5 million to repay an existing term loan. On November 1, 2018, it sold Lake Lofts at Deerwood for approximately $20.0 million and used the proceeds to reduce the revolving credit facility.
- Key risks include tenant bankruptcies and anchor vacancies, retail-sector and online-commerce competition, interest-rate and refinancing risk, property impairment, geographic concentration, access to capital, joint venture obligations, development execution, and maintaining REIT status.
- The Company had $337.4 million of interest-rate derivatives. A 100-basis-point change in rates on unhedged variable-rate debt would affect annual cash flow by approximately $1.6 million.
- The Company provided guarantees related to consolidated joint venture debt and a hotel construction loan; outstanding letters of credit totaled $4.1 million. Management stated that no material litigation was pending.
Investor verification points
- Reconcile GAAP net loss with FFO and assess whether operating cash flow and distributions remain sustainable.
- Review the $38.8 million impairment charges, related property valuations, and the assumptions supporting future hold periods.
- Confirm the impact of the October term-loan refinancing, the November property sale, and subsequent revolving-credit paydown on leverage and liquidity.
- Monitor anchor tenant vacancies, economic occupancy, leasing spreads, and the effect of tenant bankruptcies on rental income.
- Evaluate upcoming capital requirements, including the $12.0 million redemption obligation, tenant improvements, redevelopment spending, and development commitments.
- Review debt maturities, covenant compliance, interest-rate exposure, derivative coverage, and refinancing requirements.
- Consider the effect of property dispositions and joint ventures on recurring revenue, NOI, asset scale, and exposure to unconsolidated obligations.