Kite Realty Group Trust — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
Kite Realty Group Trust is a REIT focused on owning, operating, leasing, developing, redeveloping and managing neighborhood and community shopping centers and related commercial properties in selected U.S. markets. This filing covers the three months ended March 31, 2014, with comparison to the same period of 2013. At quarter-end, the Company owned interests in 68 properties, including 66 retail properties and two commercial properties, and had two development properties under construction.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $42.7 million | $31.0 million | +$11.6 million, or 37.4% |
| Operating income | $5.2 million | $8.7 million | -$3.5 million |
| Consolidated net income | $4.5 million | $2.1 million | +$2.4 million |
| Net income attributable to common shareholders | $2.2 million | $(0.1) million | +$2.3 million |
| Basic and diluted earnings per common share | $0.02 | $(0.00) | Improved |
| Cash flow from operations | $6.5 million | $12.7 million | -$6.2 million |
| Funds from operations allocable to the Company | $12.4 million | $10.6 million | +$1.8 million |
| Adjusted FFO of the Kite Portfolio | $17.5 million | $11.6 million | +$5.8 million |
Rental income and tenant reimbursements increased 55.3%, primarily from 2013 property acquisitions, recently operational development properties, improved occupancy and higher recoveries. Same-property NOI increased 4.7% to $16.3 million, while same-property leased occupancy improved to 96.4% from 95.1%. The consolidated operating margin was approximately 12.2%, compared with approximately 28.1% in the prior-year quarter, reflecting higher depreciation, merger costs and property expenses.
Net income benefited from a $3.2 million gain in discontinued operations and a $3.5 million gain on sales of operating properties. These gains offset a continuing-operations loss of $2.2 million. The Company declared a common distribution of $0.065 per share, an 8.3% increase from the prior-quarter distribution, and paid $2.1 million of preferred distributions.
Balance Sheet, Debt and Liquidity
- Total assets were $1.76 billion at March 31, 2014, including $1.62 billion of net investment properties.
- Total mortgage and other indebtedness was $871.3 million, up from $857.1 million at December 31, 2013. Total debt had a weighted-average interest rate of 3.69% and weighted-average maturity of 3.8 years.
- After interest-rate hedges, approximately 69% of debt was fixed-rate and 31% was variable-rate. The Company had $326.7 million of interest-rate hedges.
- Cash and cash equivalents were $31.9 million. The unsecured revolving credit facility had $49.8 million available for future borrowings after outstanding draws and letters of credit.
- The Company was in compliance with applicable credit facility and term-loan covenants at quarter-end.
- Company share of net debt was $787.3 million, and net debt to annualized adjusted EBITDA was 7.31x under the Company’s non-GAAP calculation.
- Cash flows included $33.4 million of net property-sale proceeds, $20.3 million of capital expenditures, $41.3 million of loan borrowings and $27.1 million of loan repayments.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected the 2013 acquisition program, which contributed approximately $10.2 million of incremental rental income in Q1 2014.
- Merger and acquisition costs increased to $4.5 million from $0.2 million, primarily for due diligence and legal expenses related to the Inland Diversified transaction.
- Depreciation and amortization increased by $6.1 million, and interest expense increased by $1.1 million, as acquired and newly completed properties entered service and capitalized interest declined.
- The Company sold Red Bank Commons, Ridge Plaza and 50th and 12th for aggregate proceeds of $35.2 million and a net gain of $6.7 million.
- No operating properties or land for development were acquired during the quarter, compared with the prior-year acquisition activity.
- Delray Marketplace was substantially completed and transferred to the operating portfolio. Development and redevelopment activity continued at Holly Springs, Parkside Town Commons, Bolton Plaza, Gainesville Plaza and King’s Lake Square.
Outlook, Management Commentary, Risks and Unusual Items
Management reported continued opportunities for leasing, renewals and tenant expansion but noted risks from soft consumer demand, tenant bankruptcies, delayed leasing decisions, rent concessions, reduced demand for retail space and potential lease terminations. During the quarter, the Company executed 44 new and renewal leases totaling 259,600 square feet.
On February 9, 2014, the Company entered into a stock-for-stock merger agreement with Inland Diversified Real Estate Trust. The transaction had an estimated value of approximately $2.1 billion, including assumed debt of approximately $0.9 billion, and was expected to close in early Q3 2014 subject to shareholder approval and customary conditions. Inland Diversified owned a 59-property retail portfolio that was 96.2% leased at March 31, 2014. The Company also expected to sell certain acquired multifamily assets at or shortly after closing.
The Company expected to incur approximately $7 million to $9 million of additional major tenant improvements and renovation costs over the following twelve months. Five development and redevelopment projects had an estimated total cost of approximately $185 million, with $99 million incurred and approximately $86 million expected over the following 18 months. Management stated that existing construction financing and potential revolver borrowings should fund these projects.
Approximately $77.4 million of property-level debt secured by Rangeline Crossing and Delray Marketplace was scheduled to mature in Q4 2014. The Company was pursuing repayment, refinancing or extensions and identified revolver borrowings, capital-market transactions or property sales as potential alternatives. Interest-rate sensitivity disclosures indicated that a 100-basis-point increase would reduce the fair value of fixed-rate debt by approximately $9.1 million and increase annual cash flow costs on variable-rate debt by approximately $2.7 million.
The Company reported no material litigation, no material off-balance-sheet arrangements and effective disclosure controls. It early adopted ASU 2014-08, which changed discontinued-operations presentation and affected the classification of property disposals.
Important Facts for Investors to Verify
- Completion, shareholder approval, final exchange ratio, financing effects and integration risks associated with the Inland Diversified merger.
- Refinancing or repayment of the $77.4 million of property-level debt maturing in Q4 2014.
- Ability to fund the remaining approximately $86 million of development and redevelopment costs and anticipated tenant-improvement expenditures.
- Trend in same-property NOI, occupancy, rent collections and tenant reimbursement recoveries.
- Sustainability of distributions in light of operating cash flow of $6.5 million, debt service, capital expenditures and REIT distribution requirements.
- Leverage, including the reported 7.31x net debt-to-annualized adjusted EBITDA ratio and the effect of additional merger-related debt or equity issuance.
- Exposure to variable interest rates, tenant financial weakness, geographic concentration and refinancing conditions.