Kite Realty Group Trust 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of Common Shares outstanding as of November 2, 2010 was 63,339,755 ($.01 par value)
KITE REALTY GROUP TRUST
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Kite Realty Group Trust
Condensed Consolidated Balance Sheets
The accompanying notes are an integral part of these condensed consolidated financial statements.
Kite Realty Group Trust
Condensed Consolidated Statements of Operations
The accompanying notes are an integral part of these condensed consolidated financial statements.
Kite Realty Group Trust
Condensed Consolidated Statement of Shareholders’ Equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
Kite Realty Group Trust
Condensed Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these condensed consolidated financial statements.
Kite Realty Group Trust
Notes to Condensed Consolidated Financial Statements
September 30, 2010
Note 1. Organization
Kite Realty Group Trust (the “Company”), through its majority-owned subsidiary, Kite Realty Group, L.P. (the “Operating Partnership”), is engaged in the ownership, operation, management, leasing, acquisition, construction, expansion and development of neighborhood and community shopping centers and certain commercial real estate properties in selected markets in the United States. The Company also provides real estate facilities management, construction, development and other advisory services to third parties through its taxable REIT subsidiary. At September 30, 2010, the Company owned interests in 60 properties (consisting of 51 retail operating properties, five retail properties under redevelopment and four commercial operating properties). As of this date, the Company also had two retail properties under development.
Note 2. Basis of Presentation, Consolidation and Investments in Joint Ventures, and Noncontrolling Interests
The Company’s management has prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the presentation not misleading. The unaudited financial statements as of September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The consolidated financial statements in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s 2009 Annual Report on Form 10-K. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates. The results of operations for the interim periods are not necessarily indicative of the results that may be expected on an annual basis.
Consolidation and Investments in Joint Ventures
The accompanying financial statements of the Company are presented on a consolidated basis and include all accounts of the Company, the Operating Partnership, the taxable REIT subsidiary of the Operating Partnership, subsidiaries of the Company or the Operating Partnership that are controlled and any variable interest entities (“VIEs”) in which the Company is the primary beneficiary. In general, a VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) has equity investors that do not provide sufficient financial resources for the entity to support its activities, (b) does not have equity investors with voting rights or (c) has equity investors whose votes are disproportionate from their economics and substantially all of the activities are conducted on behalf of the investor with disproportionately fewer voting rights. The Company consolidates properties that are wholly owned as well as properties it controls but in which it owns less than a 100% interest. Control of a property is demonstrated by:
The Company considers all relationships between itself and the VIE, including development agreements, management agreements and other contractual arrangements, in determining whether it has the power to direct the activities of the VIE that most significantly affect the VIE’s performance. The Company also continuously reassesses primary beneficiary status. Other than with regard to The Centre, as described below, there were no changes during 2010 or 2009 to the Company’s conclusions regarding whether an entity qualifies as a VIE or whether the Company is the primary beneficiary of any previously identified VIE.
The third party loan secured by The Centre, a previously unconsolidated operating property in which we own a 60% interest, matured in the third quarter of 2009. In order to pay off this loan, the Company made a capital contribution of $2.1 million and simultaneously extended a loan of $1.4 million to the partnership. At September 30, 2010, $0.7 million of this loan remained outstanding, bearing interest at 15%, and is due within 30 days upon demand. The Company’s extension of a loan and contribution of equity to the partnership caused the Company to conclude that The Centre qualifies as a VIE and the Company is its primary beneficiary. As a result, the financial statements of The Centre were consolidated as of September 30, 2009, the assets and liabilities were recorded at fair value, and a non-cash gain of $1.6 million was recorded, of which the Company’s share was $1.0 million. A market participant income approach was utilized to estimate the fair value of the investment property, related intangibles, and noncontrolling interest. The income approach required the Company to make assumptions about market leasing rates, discount rates, noncontrolling interests and disposal values using Level 2 and Level 3 inputs.
As of September 30, 2010, the Company had investments in seven joint ventures that are VIEs in which the Company is the primary beneficiary. As of this date, these VIEs had total debt of $86.6 million which is secured by assets of the VIEs with net book values totaling $178.2 million. The Operating Partnership guarantees the debt of these VIEs; however, the VIEs could sell the properties before the performance of a guarantee would be required.
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as it exercises significant influence over, but does not control, operating and financial policies. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
Noncontrolling interests are reported as equity and the amount of consolidated net income specifically attributable to noncontrolling interests is identified in the accompanying condensed consolidated financial statements. The noncontrolling interests in certain of our properties for the nine months ended September 30, 2010 and 2009 were as follows:
Redeemable noncontrolling interests in the Operating Partnership are reflected as temporary equity in the accompanying condensed consolidated balance sheets because the Company may be required to pay cash to unitholders upon redemption of their interests in the limited partnership under certain circumstances. The carrying amount of the redeemable noncontrolling interests in the Operating Partnership is reflected at the greater of historical book value or redemption value with a corresponding adjustment to additional paid-in capital. As noted above, noncontrolling interests, including redeemable interests, receive an allocation of consolidated net income (loss) in the accompanying condensed consolidated statements of operations. The redeemable noncontrolling interests in the Operating Partnership for the nine months ended September 30, 2010 and 2009 was as follows:
The following sets forth comprehensive income allocable to noncontrolling interests for the nine months ended September 30, 2010 and 2009:
The Company allocates net operating results of the Operating Partnership based on the partners’ weighted average ownership interest. The Company adjusts the redeemable noncontrolling interests in the Operating Partnership at the end of each period to reflect their interests in the Operating Partnership. This adjustment is reflected in the Company’s shareholders’ equity. The weighted average ownership interests of the Company and the redeemable noncontrolling interests in the Operating Partnership for the three and nine months ended September 30, 2010 and 2009 were as follows:
At September 30, 2010, the ownership interests of the Company and the noncontrolling interests in the Operating Partnership were 89.0% and 11.0%, respectively. At December 31, 2009, the ownership interests of the Company and the noncontrolling interests in the Operating Partnership were 88.8% and 11.2%, respectively.
Note 3. Earnings Per Share
Basic earnings per share is calculated based on the weighted average number of shares outstanding during the period. Diluted earnings per share is determined based on the weighted average number of shares outstanding combined with the incremental average shares that would have been outstanding assuming all potentially dilutive shares were converted into common shares as of the earliest date possible.
Potentially dilutive securities include outstanding share options, units in the Operating Partnership, which may be exchanged, at our option, for either cash or common shares under certain circumstances and deferred share units, which may be credited to the accounts of non-employee trustees in lieu of the payment of cash compensation or the issuance of common shares to such trustees. Due to the Company’s net losses for the three and nine month periods ended September 30, 2010 and 2009, the potentially dilutive securities were not dilutive for those periods.
For the three and nine months ended September 30, 2010, 1.1 million outstanding common share options were excluded from the computation of diluted earnings per share because their impact was not dilutive. For the three and nine months ended September 30, 2009, 1.2 million outstanding common share options were excluded from the computation of diluted earnings per share because their impact was not dilutive.
Note 4. Discontinued Operations
In December 2009, the Company transferred its Galleria Plaza operating property in Dallas, Texas to the ground lessor. The Company had determined during the third quarter of 2009 that there was no value to the improvements and intangibles related to Galleria Plaza and recognized a non-cash impairment charge of $5.4 million to write off the net book value of the property. Since the Company ceased operating this property during the fourth quarter of 2009, its operating results have been reclassified and are reflected as discontinued operations for the three and nine months ended September 30, 2009.
Note 5. Mortgage and Other Indebtedness
Consolidated mortgage and other indebtedness consisted of the following at September 30, 2010 and December 31, 2009:
Consolidated indebtedness, including weighted average maturities and weighted average interest rates at September 30, 2010, is summarized below:
Mortgage and construction loans are collateralized by certain real estate properties and leases. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms through 2022. Variable interest rates on mortgage and construction loans are based on LIBOR plus a spread of 125 to 400 basis points. At September 30, 2010, the one-month LIBOR interest rate was 0.26%. Fixed interest rates on mortgage loans range from 5.16% to 7.65%.
For the nine months ended September 30, 2010, the Company had loan borrowings of $32.6 million and loan repayments of $21.6 million. The major components of this activity are as follows:
Unsecured Revolving Credit Facility and Unsecured Term Loan
As of September 30, 2010, the unsecured revolving credit facility (the “unsecured facility”) was scheduled to mature on February 20, 2011, with a one-year extension option to February 20, 2012 (subject to certain customary conditions, including continued compliance with restrictive covenants). In October 2010, the Company exercised the one-year extension option on the unsecured facility. As a result, the unsecured facility now matures in February 2012. See “Note 12, Subsequent Events.” The unsecured term loan (the “Term Loan”) has a maturity date of July 15, 2011.
The amount that the Company may borrow under the unsecured facility is based on the value of assets in its unencumbered property pool. As of September 30, 2010, the Company has 51 unencumbered properties and other assets used to calculate the value of the unencumbered property pool, of which 47 are wholly owned and four are owned through joint ventures. As of September 30, 2010, the total amount available for borrowing under the unsecured credit facility was $42.5 million.
The Operating Partnership’s ability to borrow further amounts under the unsecured facility and the Term Loan is subject to ongoing compliance by the Company, the Operating Partnership and their subsidiaries with various restrictive covenants, including those with respect to liens, indebtedness, investments, dividends, mergers and asset sales. The unsecured facility and the Term Loan also require the Company to satisfy certain financial covenants.
Fair Value of Fixed and Variable Rate Debt
As of September 30, 2010, the fair value of fixed rate debt was $315.5 million compared to the book value of $296.6 million. The fair value was estimated using cash flows discounted at current borrowing rates for similar instruments which ranged from 3.11% to 5.09%. As of September 30, 2010, the fair value of variable rate debt was $359.7 million compared to the book value of $371.9 million. The fair value was estimated using cash flows discounted at current borrowing rates for similar instruments which ranged from 3.26% to 7.90%.
Note 6. Shareholders’ Equity
On September 17, 2010, the Company’s Board of Trustees declared a cash distribution of $0.06 per common share for the third quarter of 2010. Simultaneously, the Company’s Board of Trustees declared a cash distribution of $0.06 per Operating Partnership unit for the same period. These distributions were paid on October 13, 2010 to shareholders and unitholders of record as of October 6, 2010.
In February 2010, the Compensation Committee of the Company’s Board of Trustees approved long-term equity incentive compensation awards totaling approximately 124,000 restricted shares and 146,000 share options to management and other employees. The restricted shares were granted at a fair value of $4.15 and will vest ratably over a period of three to five years beginning on the first anniversary date of the grant. The share options were issued with an exercise price of $4.15 and will vest ratably over five years beginning on the first anniversary date of the grant. The fair value of the options was determined using the Black-Scholes valuation methodology.
For the three and nine months ended September 30, 2010, respectively, 105,000 and 115,000 Operating Partnership units were exchanged for the same number of common shares.
Note 7. Derivative Instruments, Hedging Activities and Other Comprehensive Income
The Company is exposed to capital market risk, including changes in interest rates. In order to manage volatility relating to variable interest rate risk, the Company enters into interest rate hedging transactions from time to time. The Company does not use derivatives for trading or speculative purposes nor does the Company currently have any derivatives that are not designated as cash flow hedges. The Company has agreements with each of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of September 30, 2010, the Company was party to various consolidated cash flow hedge agreements with notional amounts totaling $219.4 million, which effectively fix certain variable rate debt at interest rates ranging from 2.98% to 6.56% and mature over various terms through 2017.
These interest rate hedge agreements are the only assets or liabilities that the Company records at fair value on a recurring basis. The valuation is determined using widely accepted techniques including discounted cash flow analysis, which considers the contractual terms of the derivatives (including the period to maturity) and uses observable market-based inputs such as interest rate curves and implied volatilities. The Company also incorporates credit valuation adjustments to reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
As a basis for considering market participant assumptions in fair value measurements, accounting guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs for identical instruments that are classified within Level 1 and observable inputs for similar instruments that are classified within Level 2) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3). In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
At September 30, 2010 the fair value of the Company’s interest rate hedge liabilities was $5.9 million, including accrued interest of $0.5 million, and was recorded in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet. At December 31, 2009 the fair value of the Company’s interest rate hedge liabilities was $7.0 million, including accrued interest of $0.5 million, and was recorded in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet.
The Company currently expects an increase to interest expense of $4.5 million as the hedged forecasted interest payments occur. No hedge ineffectiveness on cash flow hedges was recognized by the Company during any period presented. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings during the remainder of 2010 and the first nine months of 2011. During the three months ended September 30, 2010 and 2009, $1.8 million and $1.7 million, respectively, was reclassified as a reduction to earnings. During the nine months ended September 30, 2010 and 2009, $5.3 million and $4.7 million, respectively, was reclassified as a reduction to earnings.
The Company’s share of net unrealized gains (losses) on its interest rate hedge agreements are the only components of its accumulated other comprehensive loss. The following sets forth comprehensive loss allocable to the Company for the three and nine months ended September 30, 2010 and 2009:
Note 8. Redevelopment Activities
During the second quarter of 2010, the Company completed plans for its redevelopment projects at Shops at Rivers Edge and Coral Springs Plaza. As part of finalizing its plans, the Company reduced the estimated useful lives of certain assets that are scheduled to be or have been demolished. As a result of this change in estimate, a total of $2.4 million and $5.8 million of additional depreciation was recognized in the three and nine months ended September 30, 2010, respectively. On a per-share basis, the effect of accelerated depreciation reduced earnings per share by $0.04 and $0.09 for the three and nine months ended September 30, 2010, respectively. Additional discussion of these redevelopment projects follows:
Shops at Rivers Edge, Indianapolis, Indiana
The former anchor tenant’s lease at this property expired on March 31, 2010. The Company has secured Nordstrom Rack, the Container Store, and Buy Buy Baby as new anchor tenants for this property. The renovations to accommodate these new tenants began in the third quarter of 2010 with expected delivery in the first half of 2011. The Company currently anticipates its incremental investment in the redevelopment at the Shops at Rivers Edge will be $15.5 million, which may increase depending on
the outcome of current negotiations with additional tenants. The Company recognized $1.9 million and $4.8 million of additional depreciation related to this property in the three and nine months ended September 30, 2010, respectively.
Coral Springs Plaza, Boca Raton, Florida
Toys “R” Us/Babies “R” Us has executed a lease with the Company to occupy the entire center, which was formerly anchored by Circuit City. This new tenant is expected to open during the fourth quarter of 2010. The Company currently anticipates its incremental investment in the redevelopment at Coral Springs Plaza will be $4.5 million. The Company recognized $0.5 million and $1.0 million of additional depreciation related to this property in the three and nine months ended September 30, 2010, respectively.
Note 9. Segment Data
The operations of the Company are aligned into two business segments: (1) real estate operations and (2) development, construction and advisory services. Segment data of the Company for the three and nine months ended September 30, 2010 and 2009 are as follows:
Note 10. Commitments and Contingencies
Eddy Street Commons at Notre Dame
Eddy Street Commons at the University of Notre Dame, located adjacent to the university in South Bend, Indiana, is the Company’s most significant in-process development project. This multi-phase project includes retail, office, hotels, a parking garage, apartments, and residential units. The Company wholly owns the retail and office components while other components are or are expected to be owned by third parties or through joint ventures. The initial phase of the project partially opened in late 2009 and consists of the retail, office and apartment and residential units. The ground beneath the initial phase of the development is leased from the University of Notre Dame over a 75 year term at a fixed rate for the first two years and based on a percentage of certain revenues thereafter. A limited service hotel, which is owned by an unconsolidated joint venture in which the Company holds a 50% interest, opened in June 2010.
The City of South Bend has contributed $35 million to the development, funded by tax increment financing (TIF) bonds issued by the City and a cash commitment from the City, both of which were used for the construction of the parking garage and infrastructure improvements to this project. The majority of the bonds are expected to be funded by real estate tax payments made by the Company and subject to reimbursement from the tenants of the property; however, the Company has no obligation to repay or guarantee the bonds. If there are delays in the development, the Company is obligated to pay certain fees. However, the Company has an agreement with the City of South Bend to limit its exposure to a maximum of $1 million as to such fees. In addition, the Company will not be in default concerning other obligations under the agreement with the City of South Bend as long as it commences and diligently pursues the completion of its obligations under that agreement.
Although the Company does not expect to own either the residential or the apartment complex components of the project, the Company has jointly guaranteed the apartment developer’s construction loan, which at September 30, 2010, had an outstanding balance of $30.3 million. The Company also has a contractual obligation in the form of a completion guarantee to the University of Notre Dame and a similar agreement in favor of the City of South Bend to complete all phases of the $200 million project (the Company’s assumed portion of which is approximately $64 million), with the exception of certain of the residential units, consistent with commitments the Company typically makes in connection with other bank-funded development projects. To the extent the hotel joint venture partner, the apartment developer/owner or the residential developer/owner fail to complete those aspects of the project, the Company will be required to complete the construction, at which time the Company would expect to have the right to seek title to the assets and assume any construction borrowings related to the assets. The Company will have certain remedies against the developers if they were to fail to complete the construction. If the Company fails to fulfill its
Joint Venture Indebtedness
Joint venture debt is the liability of the joint venture and is typically secured by the assets of the joint venture under circumstances where the lender has limited recourse to the Company. As of September 30, 2010, the Company’s share of unconsolidated joint venture indebtedness was $17.0 million, $13.5 million of which was related to the Parkside Town Commons development. The remaining $3.5 million represents the Company’s share of the $7.0 million drawn on the Eddy Street Commons limited service hotel construction loan.
As of September 30, 2010, the Operating Partnership had guaranteed its $13.5 million share of the unconsolidated joint venture debt related to the Parkside Town Commons development in the event the joint venture partnership defaults under the terms of the underlying arrangement. Mortgages which are guaranteed by the Operating Partnership are secured by the property of the joint venture and the joint venture could sell the property if required to satisfy the outstanding obligation.
Other Commitments and Contingencies
The Company is party to various actions representing routine litigation and administrative proceedings arising out of the ordinary course of business. None of these actions are expected to have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows taken as a whole.
As of September 30, 2010, the Company had outstanding letters of credit totaling $5.2 million. At that date, there were no amounts advanced against these instruments.
Note 11. Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which is effective for fiscal years beginning after November 15, 2009 and introduces a more qualitative approach to evaluating VIEs for consolidation. This provision was primarily codified into Topic 810 – “Consolidation” in the ASC and requires a company to perform an analysis to determine whether its variable interest gives it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the entity that has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. In determining whether it has the power to direct the activities of the VIE that most significantly affect the VIE’s performance, the provision requires a company to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed. It also requires continuous reassessment of primary beneficiary status rather than periodic, event-driven assessments as previously required, and incorporates expanded disclosure requirements. The adoption of this provision on January 1, 2010 had no impact on the Company’s determination of the primary beneficiary of its VIEs. Thus, the adoption did not impact the Company’s condensed consolidated financial statements.
Note 12. Subsequent Events
In October 2010, the Company placed a $2.1 million letter of credit on one of its operating properties. No amount was advanced against this instrument.
In October 2010, in accordance with terms of the Credit Agreement, the Company paid $300,000 to exercise its option to extend the maturity date of the unsecured facility from February 20, 2011 to February 20, 2012.
Cautionary Note About Forward-Looking Statements
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by Kite Realty Group Trust (the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 cannot 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:
The Company undertakes no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in connection with the accompanying historical financial statements and related notes thereto. In this discussion, unless the context suggests otherwise, references to “our Company,” “we,” “us” and “our” mean Kite Realty Group Trust and its subsidiaries.
Our Business and Properties
Kite Realty Group Trust, through its majority-owned subsidiary, Kite Realty Group, L.P., is engaged in the ownership, operation, management, leasing, acquisition, construction, redevelopment, and development of neighborhood and community shopping centers and certain commercial real estate properties in selected markets in the United States. We derive revenues primarily from rents and reimbursement payments received from tenants under existing leases at each of our properties. We also derive revenues from providing management, leasing, real estate development, construction, and real estate advisory services through our taxable REIT subsidiary. Our operating results therefore depend materially on the ability of our tenants to make required rental payments, our ability to provide such services to third parties, conditions in the U.S. retail sector, and overall real estate market conditions.
As of September 30, 2010, we owned interests in a portfolio of 60 properties including 51 retail operating properties totaling 7.9 million square feet of gross leasable area (including non-owned anchor space), five retail properties under redevelopment totaling 0.5 million square feet of gross leasable area and four operating commercial properties totaling 0.5 million square feet of net rentable area. Also, as of September 30, 2010, we had an interest in two in-process development properties which, upon completion, are anticipated to have 0.6 million square feet of gross leasable area (including non-owned anchor space).
In addition to our in-process developments and redevelopments, we have future developments which include land parcels that are undergoing pre-development activity and are in various stages of preparation for construction to commence, including pre-leasing activity and negotiations for third party financing. As of September 30, 2010, these future developments consisted of six projects that are expected to contain 2.8 million square feet of total gross leasable area upon completion.
Finally, as of September 30, 2010, we also owned interests in other land parcels comprising approximately 93 acres that may be used for future expansion of existing properties, development of new retail or commercial properties or sold to third parties. These land parcels are classified as “Land held for development” in the accompanying condensed consolidated balance sheet.
Current Business Environment
Global economic and financial uncertainty persisted into the third quarter of 2010, and a relatively low level of consumer spending continued to adversely impact the businesses of our retail tenants and, in turn, our business. These conditions may continue to impact our business in, among others, the following ways: higher than normal tenant bankruptcies; curtailment of our tenants’ operations; delay or postponement by current or potential tenants from entering into long-term leases with us; decreased demand for retail space; difficulty in collecting rent; our need to make rent adjustments and concessions; our outlay of additional capital to prepare a tenant to open for business; and termination of leases with us by our tenants.
We believe the difficult economic conditions experienced by both our tenants and by us during the third quarter of 2010 may continue through the year and possibly beyond. While it is not clear how long these conditions will last, we believe that meaningful job growth (and a consequential increase in consumer spending) may not develop until the later stages of a broad economic recovery, although certain of our markets may begin to experience job growth sooner than the nation as a whole. Despite these difficult economic conditions, during the nine months ended September 30, 2010, we experienced an increase in interest by national and local businesses in leasing space in our shopping centers. For the first nine months of 2010, we executed a total of approximately 910,000 square feet of new and renewal leases compared to approximately 500,000 square feet in the same period of the prior year. We believe there will continue to be additional leasing opportunities during the remainder of 2010, particularly as tenants seek to lease new or renew existing space in connection with lease expirations, expansions, and other considerations.
As noted above, the current economic downturn has continued into the third quarter and it is uncertain when or if economic conditions will improve to levels of several years ago. Therefore, we continually monitor events and changes in circumstances that could indicate the carrying value of our real estate assets may not be recoverable, and we perform a review of our operating and development properties for impairment on a quarterly basis. While the ongoing challenging market conditions could require
us to recognize an impairment charge with respect to one or more of our properties in the future, there were no properties impaired as of September 30, 2010.
Ongoing Actions Taken to Address Challenging Business Environment
During the third quarter of 2010, we continued to undertake several previously announced initiatives to strengthen our balance sheet and to successfully execute our business plan in light of the challenging economic conditions in the U.S., including:
Address Near-Term Maturities. All of our 2010 term maturities have been refinanced or extended beyond December 31, 2010. We continue to seek to refinance or extend our indebtedness maturing in 2011 and beyond. As of September 30, 2010, we had a total of $272.6 million of debt, including our share of unconsolidated debt of $13.5 million, with scheduled maturity dates in 2011. A significant portion of our consolidated 2011 debt maturities as of September 30, 2010 consisted of our unsecured revolving credit facility (the “unsecured facility”) and unsecured term loan (the “Term Loan”), which had outstanding balances of approximately $105 million and $55 million, respectively, as of that date. Our Term Loan matures in July 2011 and our unsecured facility was scheduled to mature in February 2011. In October 2010, we exercised an option to extend the maturity date of our unsecured facility to February 2012, which reduced our total 2011 maturities to $167.8 million.
With regard to our $55 million Term Loan, we have had ongoing discussions with lenders as part of the implementation of a longer-term strategy to pay off all or a portion of the Term Loan and reduce our reliance on debt with short-term maturities. We may also seek to access the capital markets, including common or preferred shares available on our effective shelf registration statement, to raise proceeds to repay all or a portion of our Term Loan, or utilize the availability under our unsecured facility and a portion of our cash balances to repay a portion of this debt.
The remaining $112.8 million of our 2011 debt maturities consists of property-level debt, of which $45 million have automatic maturity extensions of one year, subject to certain customary conditions. We intend to extend the maturity dates on all of the debt subject to automatic extensions, and we currently believe that all of the conditions necessary for such extensions will be met. With respect to the remaining $67.8 million, we are pursuing other financing alternatives to enable us to repay, refinance or extend the maturity dates of these loans.
We cannot, however, provide assurance that we will successfully address all of our 2011 debt maturities on favorable terms or at all. Failure to comply with our obligations under our unsecured facility, Term Loan and various other loan agreements (including our payment obligations) could cause an event of default under such debt, which, among other things, could result in the loss of title to assets securing such loans, the acceleration of principal and interest payments or the termination of the debt facilities, or exposure to the risk of foreclosure. In addition, certain of our variable rate loans and construction loans contain cross-default provisions which provide that a violation by the Company of any financial covenant set forth in our unsecured facility agreement will constitute an event of default under the loans, which could allow the lending institutions to accelerate the amounts due under the loans. See “Item 1.A Risk Factors – Risks Related to Our Operations” in our Annual Report on Form 10-K for more information related to the risks associated with our indebtedness.
Reduce Development and Construction Activity. We have reduced our construction and development activity, and no new development projects were commenced by us in 2009 or thus far in 2010. For a discussion of our ongoing and planned development and redevelopment projects, see “Liquidity and Capital Resources – Short and Long-Term Liquidity Requirements.”
Reduce Overhead. We continue to seek to achieve overhead and other cost savings to help preserve capital and improve liquidity.
Access the Capital Markets. We will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common shares, preferred shares or other securities.
Monitor Our Cash Distribution Policy. In May 2009, our Board of Trustees reduced our quarterly cash distribution to $0.06 per common share. The reduced distribution of $0.06 per share has been maintained in each subsequent quarter including the quarter ended September 30, 2010. The lowering of our distributions has allowed us to conserve cash to fund working capital and for other general corporate purposes. Each quarter, we discuss with our Board our liquidity requirements and other relevant factors before the Board determines whether and in what amount to declare a cash distribution.
Continued Focus on Leasing. We continued to implement several initiatives to improve the execution of our leasing strategy. During the third quarter of 2010, we executed new and renewal leases totaling approximately 349,000 square feet.
Results of Operations
At September 30, 2010 and 2009, we owned interests in 60 properties consisting of 51 retail operating properties, five retail properties under redevelopment, four operating commercial properties. As of this date, we also owned interests in two retail properties under development. Of the 62 total properties held at September 30, 2010, the limited service hotel component of the development at Eddy Street Commons in South Bend, Indiana was owned through an unconsolidated joint venture and accounted for under the equity method.
The comparability of results of operations is affected by our development, redevelopment, and operating property acquisition and disposition activities in 2009 and 2010. Therefore, we believe it is most useful to review the comparisons of our 2009 and 2010 results of operations in conjunction with the discussion of our significant development, redevelopment, and operating property acquisition and disposition activities during those periods, which such discussion is set forth directly below.
The following in-process development properties were partially operational at various times from January 1, 2009 through September 30, 2010:
The following properties were in redevelopment status at various times during the period from January 1, 2009 through September 30, 2010:
In the third quarter of 2009, we paid off a third party loan on The Centre, an operating property and previously unconsolidated entity, and contributed $2.1 million of capital to the entity. In accordance with the provisions of Topic 810 – “Consolidation” of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, the financial statements of The Centre were consolidated as of September 30, 2009, and its assets and liabilities were recorded at fair value.
In the fourth quarter of 2009, we transferred our Galleria Plaza operating property in Dallas, Texas to the ground lessor. We had recognized a non-cash impairment charge of $5.4 million to write off the net book value of the property in the third quarter of 2009. Galleria Plaza’s operating results have been reclassified and are reflected as discontinued operations for the three and nine months ended September 30, 2009.
Comparison of Operating Results for the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009
The following table reflects our consolidated statements of operations for the three months ended September 30, 2010 and 2009 (unaudited):