Kite Realty Group Trust — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2015, filed November 6, 2015. 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 September 30, 2015, the Company owned interests in 121 operating and redevelopment properties, including 119 retail properties, one office property and an associated parking garage, plus three development properties under construction. The Parent Company owned approximately 97.8% of the Operating Partnership.
Financial Highlights
| Metric | Q3 2015 | Q3 2014 | Nine Months 2015 | Nine Months 2014 |
|---|---|---|---|---|
| Total revenue | $87.1 million | $88.6 million | $257.7 million | $172.1 million |
| Operating income | $16.9 million | $(1.3) million | $51.5 million | $8.2 million |
| Income from continuing operations | $3.0 million | $(16.7) million | $14.7 million | $(22.2) million |
| Net income attributable to common shareholders | $0.4 million | $(16.4) million | $10.1 million | $(19.3) million |
| Basic and diluted earnings per common share | $0.00 | $(0.20) | $0.12 | $(0.39) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $137.8 million | $10.6 million |
| Funds from operations attributable to common shareholders | $41.9 million | $24.3 million | $128.1 million | $50.2 million |
Q3 operating margin was approximately 19.4%, compared with negative 1.5% in the prior-year quarter. Nine-month operating margin was approximately 20.0%, compared with 4.8% in the prior-year period. The improvement primarily reflects lower merger-related costs and the contribution from properties acquired in the Inland Diversified merger.
- Same-property NOI increased 3.1% in Q3 and 3.5% for the nine-month period. Same-property leased occupancy was 95.4%, and economic occupancy was 93.6% at September 30, 2015.
- Comparable signed leases produced a 13.1% blended rent spread in Q3. New leases averaged $20.50 per square foot versus $14.98 of expiring rent; renewals averaged $9.61 versus $8.92.
- Cash and cash equivalents were $43.0 million at September 30, 2015, compared with $43.8 million at December 31, 2014.
- Total assets were $3.84 billion and total equity was $1.84 billion at September 30, 2015.
Debt, Liquidity, and Capital Activity
- Mortgage and other indebtedness was $1.68 billion at September 30, 2015, up from $1.55 billion at year-end 2014. Debt had a weighted-average interest rate of 4.01% and weighted-average maturity of 5.5 years.
- Approximately 92% of debt was fixed-rate or hedged, with 8% variable-rate. Interest-rate hedges had aggregate notional amounts of $543.3 million.
- The Company issued $250 million of senior unsecured notes in September at a blended rate of 4.41% and an average maturity of 9.8 years. Proceeds repaid $199.6 million drawn on the revolving facility and a $33 million secured loan.
- The $400 million unsecured term loan was fully outstanding; no amounts were drawn on the $500 million revolving credit facility. Availability under the revolving facility was approximately $390.3 million, including the effect of letters of credit.
- Debt scheduled to mature before September 30, 2016 totaled $60.7 million, excluding scheduled monthly principal payments. Management stated that the Company was in compliance with applicable debt covenants.
- Operating cash flow of $137.8 million was offset by $113.2 million of investing cash outflows and $25.5 million of financing cash outflows, resulting in a $0.9 million decrease in cash.
- Capital expenditures were $69.9 million for the first nine months, including development, redevelopment, recurring capital expenditures, tenant improvements, and leasing costs.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 49.8% to $257.7 million, principally because the 2014 Inland Diversified merger contributed a full comparable-period operating base in 2015, supplemented by additional acquisitions.
- Nine-month operating income increased $43.3 million. Merger and acquisition costs declined to $1.6 million from $26.8 million in the prior-year period.
- Nine-month interest expense increased $10.7 million because of debt assumed in the Inland Diversified merger and additional borrowings used for acquisitions and development.
- The Company acquired four operating properties during the first nine months, including Livingston Shopping Center and Chapel Hill Shopping Center, and invested $167.8 million in property acquisitions.
- The Company sold seven properties to IREIT in March 2015 for net proceeds of approximately $103.0 million and recorded a gain of approximately $3.4 million.
- A $4.5 million gain on settlement was recorded in the first nine months from an eminent-domain-related dispute.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or FFO guidance. Management expects to fund ongoing development and redevelopment primarily with existing construction loans, new construction loans, operating cash flow, and the revolving facility.
- Three development and two redevelopment projects were under construction. Total estimated project cost was $188.8 million, with $146.0 million incurred and approximately $42.8 million expected over the following 12 to 18 months.
- Management expected approximately $14 million to $16 million of additional major tenant improvements and renovation costs during the next 12 months. Potential redevelopment and repositioning opportunities were estimated at $115 million to $130 million.
- Remaining property acquisition earnout obligations were estimated at $5.9 million, with expiration dates from November 2 through December 28, 2015.
- On October 26, 2015, the Company entered into a delayed-draw unsecured term loan of up to $200 million, primarily to refinance 2016 maturities or fund the redemption of preferred shares.
- On October 30, 2015, the Company announced plans to redeem all 4.1 million Series A preferred shares on December 7, 2015, for approximately $102.6 million including accrued dividends. A non-cash charge of approximately $3.8 million was expected against income attributable to common shareholders.
- Key risks include tenant credit and bankruptcy risk, retail and real estate market conditions, refinancing and interest-rate risk, property impairment, development and acquisition execution, geographic concentration, environmental liabilities, and maintenance of REIT qualification.
- The Company reported no material litigation, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2015.
Most Important Facts for Investors to Verify
- Reconcile the substantial year-over-year revenue and FFO growth for the impact of the Inland Diversified merger, acquisitions, property sales, and redevelopment activity.
- Assess leverage, debt maturities, covenant headroom, revolving-facility availability, and the funding plan for the preferred-share redemption.
- Evaluate whether same-property NOI growth, occupancy, leasing spreads, and rent growth offset tenant-improvement and redevelopment capital requirements.
- Review the timing, cost-to-complete, financing, and leasing status of the three development and two redevelopment projects.
- Confirm the effect of the planned preferred-share redemption and the approximately $3.8 million non-cash charge on future common-shareholder results.
- Review exposure to variable interest rates, including the estimated $1.3 million annual cash-flow sensitivity for a 100-basis-point rate change on unhedged variable-rate debt.