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Kite Realty Group Trust Reports Third Quarter 2018 Operating Results

Company Release - 10/31/2018 4:15 PM ET

INDIANAPOLIS, Oct. 31, 2018 (GLOBE NEWSWIRE) -- Kite Realty Group Trust (NYSE:KRG) (KRG) announced today its operating results for the third quarter ended September 30, 2018.

“2018 continues to be a year of strong operational performance and strategic execution,” said Chairman and Chief Executive Officer, John Kite. “During the third quarter, we improved our operating portfolio’s ABR, increased our small shop leased percentage, and executed 93 new and renewal leases for 446,000 square feet. Approximately 70% of our executed leases and tenant openings were restaurant, grocery, and service offerings. We recently announced noteworthy additions to our executive team with the hiring of Heath Fear as Executive Vice President & Chief Financial Officer, and the promotion of Wade Achenbach to Executive Vice President, Portfolio Management.”

Third Quarter Highlights

Financial Results

  • Realized net income attributable to common shareholders of $3.9 million, or $0.05 per common share (compared to a net loss of $0.6 million for the same period in 2017).
  • Generated Funds from Operations of the Operating Partnership (FFO), as defined by NAREIT, of $41.1 million, or $0.48 per diluted common share (compared to $41.8 million, or $0.49 per diluted common share, for the same period in 2017).

Portfolio Operations

  • Increased Same-Property Net Operating Income (NOI) 1.5% compared to the same period in the prior year, with base rent growth of 1.9% being partially offset by an increase in expenses net of recoveries.
  • Increased small shop leased percentage by 50 basis points sequentially to 90.9%.
  • Executed 93 leases and opened 39 new tenants, approximately 70% of which were restaurant, grocery, and service offerings.
  • Improved annualized base rent (ABR) for the operating retail portfolio to $16.77 per square foot (up 5% from the same period in 2017).

Development

  • Completed development of Embassy Suites by Hilton at Notre Dame – the newest addition to the Eddy Street Commons mixed-use development in South Bend, IN. The hotel is owned by an unconsolidated joint venture in which KRG has a 35% interest.
  • Delivered $10.5 million redevelopment project at Fishers Station (Indianapolis, IN MSA) with a projected annualized return of 11.4%. 

Portfolio Operations

As of September 30, 2018, KRG owned interests in 115 operating and redevelopment properties totaling approximately 22.4 million square feet and one development project currently under construction totaling over 0.5 million square feet. ABR for the portfolio improved to $16.77, up 5% from the same period last year. Small shop leased percentage reached 90.9%, up 50 basis points sequentially. The owned gross leasable area in KRG’s retail operating portfolio was 93.5% leased as of September 30, 2018, and the total portfolio was 93.6% leased.

Same-property NOI, which includes 104 operating properties, increased 1.5% in the third quarter compared to the same period in the prior year. Base rent growth of 1.9% was partially offset by a net increase in operating expenses primarily related to short-term anchor vacancy. The properties included in the same-property pool were 93.9% and 94.4% leased as of September 30, 2018 and 2017, respectively, while economic occupancy was at 92.3% and 93.0%, respectively, for the same periods.

KRG continued progress on its anchor space repositioning efforts with the execution of two new retail anchor leases, totaling 42,528 square feet. The new anchor leases were Sprouts Farmer’s Market at Miramar Square (Miami, FL MSA) and Old Navy at Holly Springs Towne Center (Raleigh, NC MSA). Subsequent to quarter end, anchor leases were signed with REI and Burlington for a combined 79,000 square feet.  Year to date, eight retail anchor leases have been executed.

KRG executed new and renewal leases on 93 individual spaces totaling 446,000 square feet during the third quarter of 2018, including 80 comparable new and renewal leases for 384,000 square feet. Cash rent spreads on comparable new and renewal leases executed in the quarter were 10.4% and 3.8%, respectively, for a blended cash rent spread of 4.9%. Excluding the disproportionate impact of one strategic anchor lease, the renewal and blended cash rental spreads were 6.7% and 7.3% respectively. The new, renewal, and blended leasing spreads on a GAAP basis, which includes periodic contractual rent increases over the term of the lease, were 30.2%, 8.6%, and 11.4%, respectively.

Balance Sheet

KRG currently has only a single $20.7 million mortgage maturing through 2020, and as of September 30th, the debt portfolio had a weighted average maturity of 5.0 years.

Subsequent to quarter end, KRG closed on a new $250 million ten-year unsecured term loan, extending the debt portfolio’s weighted average maturity by a full year to 6.0 years and laddering the debt maturity schedule such that no more than 20% of KRG’s debt comes due in any single calendar year (vs. 26% prior to the transaction). Execution of the term loan allowed KRG to fully retire the $200 million seven-year term loan due in 2022 and prepay $50 million of the $200 million five-year term loan due in 2021. KRG plans to fix the interest rate through an interest swap for the full $250 million within thirty days of closing. For additional information on this transaction, please see the Current Report on Form 8-K filed by KRG on October 26, 2018.

Development

During the third quarter, the Embassy Suites by Hilton at Notre Dame opened at KRG’s Eddy Street Commons mixed-use development.  The hotel is the latest addition to the development that also features 170,000 square feet of retail and office space, along with 266 multi-family units and 201 previously sold residential units. Construction on phase two of the mixed-use development is underway, featuring 452 multi-family units, 21 for-sale residential units, a community center, and 8,500 square feet of retail space.

Also during the quarter, KRG delivered the Fishers Station (Indianapolis, IN MSA) redevelopment project. KRG invested $10.5 million in the redevelopment for a projected annualized return of 11.4%. 

2018 Earnings Guidance

KRG has reaffirmed its guidance for 2018 FFO, as defined by NAREIT, to a range of $1.98 to $2.01 per diluted common share. Please refer to the full list of guidance assumptions on page 43 of the third quarter supplemental.

Guidance Range for Full Year 2018LowHigh
Consolidated net loss per diluted common share$(0.23) $(0.20) 
Add: Depreciation, amortization and other1.76  1.76  
Add: Impairment Charge 0.45   0.45  
FFO, as defined by NAREIT, per diluted common share$1.98  $2.01  
         

Earnings Conference Call

Kite Realty Group Trust will conduct a conference call to discuss its financial results on Thursday, November 1, 2018, at 11:00 a.m. Eastern Time.  A live webcast of the conference call will be available on KRG’s corporate website at www.kiterealty.com. The dial-in numbers are (844) 309-0605 for domestic callers and (574) 990-9933 for international callers (passcode 8178656).  In addition, a webcast replay link will be available on the corporate website.

Additional Materials

Financial statements, exhibits, and reconciliations of non-GAAP measures attached to this release include the details of KRG’s results.

About Kite Realty Group Trust

Kite Realty Group Trust is a full-service, vertically integrated real estate investment trust (REIT) that provides communities with convenient and beneficial shopping experiences. We connect consumers to tenants in desirable markets through our portfolio of neighborhood, community, and lifestyle centers. Using operational, development, and redevelopment expertise, we continuously optimize our portfolio to maximize value and return to our shareholders. For more information, please visit our website at kiterealty.com.

Safe Harbor

Certain statements in this document that are not historical fact may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, performance, transactions or achievements, financial or otherwise, may differ materially from the results, performance, transactions or achievements, financial or otherwise, expressed or implied by the forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to: national and local economic, business, real estate and other market conditions, particularly in light of low growth in the U.S. economy as well as economic uncertainty caused by fluctuations in the prices of oil and other energy sources and inflationary trends or outlook; financing risks, including the availability of, and costs associated with, sources of liquidity; KRG’s ability to refinance, or extend the maturity dates of, its indebtedness; the level and volatility of interest rates; the financial stability of tenants, including their ability to pay rent and the risk of tenant bankruptcies; the competitive environment in which KRG operates; acquisition, disposition, development and joint venture risks; property ownership and management risks; KRG’s ability to maintain its status as a real estate investment trust for federal income tax purposes; potential environmental and other liabilities; impairment in the value of real estate property KRG owns; the impact of online retail competition and the perception that such competition has on the value of shopping center assets; risks related to the geographical concentration of KRG’s properties in Florida, Indiana and Texas; insurance costs and coverage; risks associated with cybersecurity attacks and the loss of confidential information and other business interruptions; and other factors affecting the real estate industry generally. KRG refers you to the documents filed by KRG from time to time with the SEC, specifically the section titled “Risk Factors” in KRG’s and the Operating Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which discuss these and other factors that could adversely affect KRG’s results. KRG undertakes no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Kite Realty Group Trust
Consolidated Balance Sheets
(Unaudited)

($ in thousands)    
  September 30,
2018
 December 31,
2017
Assets:    
Investment properties, at cost $3,752,472  $3,957,884 
Less: accumulated depreciation (700,728) (664,614)
  3,051,744  3,293,270 
     
Cash and cash equivalents 30,709  24,082 
Tenant and other receivables, including accrued straight-line rent of $31,730 and $31,747 respectively, net of allowance for uncollectible accounts 57,133  58,328 
Restricted cash and escrow deposits 10,307  8,094 
Deferred costs and intangibles, net 99,253  112,359 
Prepaid and other assets 17,371  12,465 
Investments in unconsolidated subsidiaries 13,836  3,900 
Asset held for sale 5,531   
Total Assets $3,285,884  $3,512,498 
Liabilities and Shareholders’ Equity:    
Mortgage and other indebtedness, net $1,578,328  $1,699,239 
Accounts payable and accrued expenses 98,537  78,482 
Deferred revenue and other liabilities 82,723  96,564 
Total Liabilities 1,759,588  1,874,285 
Commitments and contingencies    
Limited Partners’ interests in the Operating Partnership and other redeemable noncontrolling interests 47,426  72,104 
Shareholders’ Equity:    
Kite Realty Group Trust Shareholders’ Equity:    
Common Shares, $.01 par value, 225,000,000 shares authorized, 83,720,286 and 83,606,068 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively 837  836 
Additional paid in capital 2,076,552  2,071,418 
Accumulated other comprehensive loss 5,700  2,990 
Accumulated deficit (604,917) (509,833)
Total Kite Realty Group Trust Shareholders’ Equity 1,478,172  1,565,411 
Noncontrolling Interests 698  698 
Total Equity 1,478,870  1,566,109 
Total Liabilities and Shareholders' Equity $3,285,884  $3,512,498 
         

Kite Realty Group Trust
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2018 and 2017
(Unaudited)

($ in thousands, except per share data)        
  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2018 2017 2018 2017
Revenue:        
Minimum rent $65,328  $67,585  $202,475  $204,926 
Tenant reimbursements 18,185  17,657  54,221  54,748 
Other property related revenue 2,129  1,896  8,119  10,226 
Fee income 105    2,430   
Total revenue 85,747  87,138  267,245  269,900 
Expenses:        
Property operating 12,092  11,859  37,184  36,950 
Real estate taxes 11,205  10,826  32,351  32,384 
General, administrative, and other 4,865  5,431  16,364  16,389 
Depreciation and amortization 36,858  42,793  115,864  131,333 
Impairment charges     38,847  7,411 
Total expenses 65,020  70,909  240,610  224,467 
Operating income 20,727  16,229  26,635  45,433 
Interest expense (16,058) (16,372) (49,141) (49,250)
Income tax benefit of taxable REIT subsidiary 27  33  78  64 
Other expense, net (379) (94) (643) (314)
Income (loss) from continuing operations 4,317  (204) (23,071) (4,067)
Gains on sales of operating properties     8,329  15,160 
Net income (loss) 4,317  (204) (14,742) 11,093 
Net income attributable to noncontrolling interests (379) (418) (604) (1,528)
Net income (loss) attributable to Kite Realty Group Trust common shareholders $3,938  $(622) $(15,346) $9,565 
         
Income (loss) per common share - basic and diluted $0.05  $(0.01) (0.18) 0.11 
         
Weighted average common shares outstanding - basic 83,706,704  83,594,163  83,670,038  83,581,847 
Weighted average common shares outstanding - diluted 83,767,655  83,594,163  83,670,038  83,689,590 
Cash dividends declared per common share $0.3175  $0.3025  $0.9525  $0.9075 
         

Kite Realty Group Trust
Funds From Operations
For the Three and Nine Months Ended September 30, 2018 and 2017
(Unaudited)

($ in thousands, except per share data)        
  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2018 2017 2018 2017
Funds From Operations        
Consolidated net income (loss) $4,317  $(204) $(14,742) $11,093 
Less: net income attributable to noncontrolling interests in properties (285) (432) (979) (1,302)
Less: gains on sales of operating properties     (8,329) (15,160)
Add: impairment charges     38,847  7,411 
Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests 37,045  42,474  115,501  129,890 
FFO of the Operating Partnership1 41,077  41,838  130,298  131,932 
Less: Limited Partners' interests in FFO (986) (949) (3,127) (2,995)
FFO attributable to Kite Realty Group Trust common shareholders1 $40,091  $40,889  $127,171  $128,937 
FFO, as defined by NAREIT, per share of the Operating Partnership - basic $0.48  $0.49  $1.52  $1.54 
FFO, as defined by NAREIT, per share of the Operating Partnership - diluted $0.48  $0.49  $1.52  $1.54 
         
         
Weighted average common shares outstanding - basic 83,706,704  83,594,163  83,670,038  83,581,847 
Weighted average common shares outstanding - diluted 83,767,655  83,708,719  83,719,308  83,689,590 
Weighted average common shares and units outstanding - basic 85,768,857  85,580,993  85,717,440  85,561,343 
Weighted average common shares and units outstanding - diluted 85,829,808  85,695,549  85,766,710  85,669,087 
         
FFO, as defined by NAREIT, per diluted share/unit        
Consolidated net income (loss) $0.05  $  $(0.17) $0.13 
Less: net income attributable to noncontrolling interests in properties   (0.01) (0.01) (0.02)
Less: gains on sales of operating properties     (0.10) (0.18)
Add: impairment charges     0.45  0.09 
Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests 0.43  0.50  1.35  1.52 
FFO, as defined by NAREIT, of the Operating Partnership per diluted share/unit1 $0.48  $0.49  $1.52  $1.54 
         


____________________
1“FFO of the Operating Partnership" measures 100% of the operating performance of the Operating Partnership’s real estate properties. “FFO attributable to Kite Realty Group Trust common shareholders” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership.

Funds from Operations (FFO) is a widely used performance measure for real estate companies and is provided here as a supplemental measure of operating performance. The Company calculates FFO, a non-GAAP financial measure, in accordance with the best practices described in the April 2002 National Policy Bulletin of the National Association of Real Estate Investment Trusts ("NAREIT"). The NAREIT white paper defines FFO as net income (determined in accordance with GAAP), excluding gains (or losses) from sales and impairments of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

Considering the nature of our business as a real estate owner and operator, the Company believes that FFO is helpful to investors in measuring our operational performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance, is not an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, and is not indicative of funds available to satisfy our cash needs, including our ability to make distributions. Our computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.

Kite Realty Group Trust
Same Property Net Operating Income
For the Three and Nine Months Ended September 30, 2018 and 2017
(Unaudited)

($ in thousands)           
 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 % Change 2018 2017 % Change
Number of properties for the quarter1 104   104         
            
Leased percentage at period end93.9% 94.4%   93.9% 94.4%  
Economic Occupancy percentage292.3% 93.0%   92.9% 93.6%  
            
Minimum rent$59,913  $58,820    $175,734  $173,448   
Tenant recoveries17,299  16,188    50,432  48,722   
Other income430  391    941  849   
 77,642  75,399    227,107  223,019   
            
Property operating expenses(11,144) (10,368)   (32,611) (30,873)  
Bad debt expense(537) (508)   (1,352) (1,971)  
Real estate taxes(10,601) (9,981)   (30,291) (29,693)  
 (22,282) (20,857)   (64,254) (62,537)  
Same Property NOI3$55,360  $54,542  1.5% $162,853  $160,482  1.5%
            
Reconciliation of Same Property NOI to Most Directly Comparable GAAP Measure:           
Net operating income - same properties$55,360  $54,542    $162,853  $160,482   
Net operating income - non-same activity46,985  9,911    32,427  40,084   
Other (expense) income, net(247) (61)   1,865  (250)  
General, administrative and other(4,865) (5,431)   (16,364) (16,389)  
Impairment charges      (38,847) (7,411)  
Depreciation and amortization expense(36,858) (42,793)   (115,864) (131,333)  
Interest expense(16,058) (16,372)   (49,141) (49,250)  
Gains on sales of operating properties      8,329  15,160   
Net income attributable to noncontrolling interests(379) (418)   (604) (1,528)  
Net (loss) income attributable to common shareholders$3,938  $(622)   $(15,346) $9,565   
                    


____________________
1Same Property NOI excludes five properties in redevelopment, the recently completed City Center, Burnt Store Marketplace, and Fishers Station redevelopments as well as office properties (Thirty South Meridian and Eddy Street Commons).
2Excludes leases that are signed but for which tenants have not yet commenced the payment of cash rent.  Calculated as a weighted average based on the timing of cash rent commencement and expiration during the period.
3Same Property NOI excludes net gains from outlot sales, straight-line rent revenue, lease termination fees, amortization of lease intangibles, fee income and significant prior period expense recoveries and adjustments, if any.
4Includes non-cash activity across the portfolio as well as net operating income from properties not included in the same property pool.

The Company uses same property NOI ("Same Property NOI"), a non-GAAP financial measure, to evaluate the performance of our properties. Same Property NOI excludes properties that have not been owned for the full period presented. It also excludes net gains from outlot sales, straight-line rent revenue, lease termination fees, amortization of lease intangibles and significant prior period expense recoveries and adjustments, if any. The Company believes that Same Property NOI is helpful to investors as a measure of our operating performance because it includes only the NOI of properties that have been owned and fully operational for the full quarters presented.  The Company believes such presentation eliminates disparities in net income due to the acquisition or disposition of properties during the particular quarters presented and thus provides a more consistent comparison of our properties. The year-to-date results represent the sum of the individual quarters, as reported.

NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of our financial performance. Our computation of NOI and Same Property NOI may differ from the methodology used by other REITs, and therefore may not be comparable to such other REITs.

When evaluating the properties that are included in the same property pool, the Company has established specific criteria for determining the inclusion of properties acquired or those recently under development. An acquired property is included in the same property pool when there is a full quarter of operations in both years subsequent to the acquisition date. Development and redevelopment properties are included in the same property pool four full quarters after the properties have been transferred to the operating portfolio. A redevelopment property is first excluded from the same property pool when the execution of a redevelopment plan is likely and the Company begins recapturing space from tenants. For the quarter ended September 30, 2018, the Company excluded five redevelopment properties and the recently completed City Center, Burnt Store Marketplace, and Fishers Station redevelopments from the same property pool that met these criteria and were owned in both comparable periods.

Contact Information:
Wade Achenbach
EVP, Portfolio Management
317.713.5660
wachenbach@kiterealty.com

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Source: Kite Realty Group Trust
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