Kite Realty Group Trust — Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2016. 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 portfolio included 120 operating and redevelopment properties, one office property and parking garage, and one development property under construction. The Parent Company owned approximately 97.7% of the Operating Partnership.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $89.1 million | $87.1 million | $265.2 million | $257.7 million |
| Operating income | $15.9 million | $16.9 million | $47.8 million | $51.5 million |
| Net income attributable to common shareholders | $(1.7) million | $0.4 million | $(2.2) million | $10.1 million |
| Basic and diluted EPS | $(0.02) | $0.00 | $(0.03) | $0.12 |
| Cash flow from operations | Not separately provided | Not separately provided | $120.7 million | $136.0 million |
| FFO attributable to common shareholders | $42.7 million | $41.9 million | $125.8 million | $128.1 million |
| Adjusted FFO of Operating Partnership | $44.7 million | $43.9 million | $132.9 million | $127.8 million |
Operating margin, calculated as operating income divided by revenue, was approximately 17.8% in Q3 2016 versus 19.4% in Q3 2015, and approximately 18.0% for the first nine months versus 20.0% in the prior-year period. Same-property NOI increased 2.1% in the quarter and 2.7% year to date. Same-property leased percentage was 95.3% and economic occupancy was 93.6% for the quarter.
- Rental income, including tenant reimbursements, increased 4.8% in Q3 and 3.9% for the first nine months.
- Comparable signed leases produced a 9.7% blended rent spread in Q3. Annualized base rent per square foot increased to $15.42 from $15.24 at September 30, 2015.
- Property operating expense as a percentage of revenue improved to 13.4% from 13.8% in Q3 and to 13.4% from 14.2% for the first nine months.
- Interest expense increased 23.5% in Q3 and 17.0% year to date, primarily due to higher fixed-rate debt, debt refinancing activity, accelerated amortization of debt issuance costs, and formerly capitalized interest becoming expensed as projects became operational.
- Common distributions declared were $0.2875 per share for Q3, compared with $0.2725 in Q3 2015.
Balance Sheet, Debt, and Liquidity
- Total assets were $3.69 billion and total liabilities were $1.95 billion at September 30, 2016.
- Mortgage and other indebtedness was $1.73 billion, compared with $1.72 billion at December 31, 2015.
- Debt was 95% fixed rate and 5% variable rate, with a weighted-average interest rate of 4.03% and weighted-average maturity of 6.6 years. Interest-rate hedges covered $474.7 million of variable-rate debt.
- Cash and cash equivalents were $28.8 million. Approximately $401 million remained available under the unsecured revolving credit facility, after considering borrowings and letters of credit.
- Net debt to annualized adjusted EBITDA was 6.9x, based on company-defined non-GAAP measures.
- The Company issued $300 million of 4.00% senior notes due October 1, 2026. Proceeds were used to retire a $200 million term loan, a $75.9 million Parkside Town Commons construction loan, and reduce revolver borrowings.
- As of September 30, the Company was in compliance with applicable debt covenants and reported unchanged investment-grade credit ratings.
Material Changes Versus the Prior Comparable Period
- Revenue increased $2.0 million in Q3 and $7.5 million year to date, primarily from acquisitions completed in 2015, development projects becoming operational, higher rents, and increased recoveries.
- Operating income declined $1.0 million in Q3 and $3.7 million year to date as expense growth and depreciation more than offset revenue growth.
- Net income attributable to common shareholders declined from $0.4 million to a $1.7 million loss in Q3 and from $10.1 million to a $2.2 million loss year to date.
- The prior-year nine-month results included a $4.5 million gain on settlement and $3.4 million of gains on property sales; 2016 included only $0.2 million of property-sale gains.
- Cash from operations decreased $15.2 million year to date, attributed primarily to the timing of real estate tax and insurance payments and higher leasing costs.
- Cash used in investing declined to $67.1 million from $110.2 million because there were no property acquisitions in 2016 and substantially fewer property-sale and acquisition-related flows.
- The Company advanced 12 projects under its 3-R redevelopment, repositioning, and repurposing initiative, with estimated aggregate costs of $58.1 million to $67.0 million and expected incremental returns averaging approximately 9% to 10%.
Guidance, Outlook, Risks, and Unusual Items
- Management did not provide explicit earnings or FFO guidance in the filing.
- The Company expected approximately $9 million to $11 million of additional major tenant improvements and renovation costs over the following 12 months, excluding 3-R properties.
- One development project under construction had an estimated total cost of $83.5 million; $80.2 million had been incurred by September 30, leaving approximately $3.3 million to be spent, primarily over the following nine months.
- Management stated that existing financing, cash from operations, and revolver capacity were expected to fund current development and redevelopment needs, but future acquisitions and development could require additional debt, equity, property dispositions, or joint-venture capital.
- Key risks include tenant financial weakness and bankruptcies, retail and real-estate market conditions, interest-rate volatility, refinancing and liquidity risk, property impairment, geographic concentration, development and redevelopment execution, environmental liabilities, cybersecurity, and maintaining REIT qualification.
- Three consolidated joint ventures were identified as variable-interest entities. Their $237.7 million of debt was secured by $498.9 million of assets and guaranteed by the Operating Partnership.
- Letters of credit totaled $12.2 million with no amounts advanced. An estimated $1.3 million earnout liability was paid on October 6, 2016, eliminating further earnout obligations.
- On November 1, 2016, the Company retired $25.0 million and $10.4 million of secured debt using revolver borrowings.
Important Facts for Investors to Verify
- Reconcile the decline in GAAP earnings with the increase in same-property NOI and adjusted FFO.
- Evaluate leverage, the 6.9x net-debt-to-EBITDA ratio, debt maturities, covenant headroom, and reliance on the revolving facility.
- Assess whether rent spreads and occupancy levels can offset higher interest expense, taxes, redevelopment costs, and tenant-improvement requirements.
- Review the economics, funding requirements, and execution risks of the 3-R projects and the development project under construction.
- Confirm the impact of the $300 million senior-notes issuance and subsequent debt retirements on interest expense, maturity concentration, and liquidity.
- Consider the absence of explicit management earnings guidance and the sensitivity of results to tenant credit quality, interest rates, and property valuations.