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.

Overview

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, expansion 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 June 30, 2009, we owned interests in 55 operating properties (consisting of 51 retail properties totaling approximately 7.9 million square feet of gross leasable area (including non-owned anchor space), three operating commercial properties totaling approximately 0.5 million square feet of net rentable area, and an associated parking garage). Also, as of June 30, 2009, we had an interest in eight properties in our development and redevelopment pipelines. Upon completion, we anticipate our current development and redevelopment properties to have approximately 1.2 million square of total gross leasable area.

In addition to our current development and redevelopment pipelines, we have a "shadow" development pipeline which includes 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 financings. As of June 30, 2009, this shadow pipeline consisted of six projects that are expected to contain approximately 2.8 million square feet of total gross leasable area upon completion. We have reduced our estimated capital expenditures in the shadow pipeline by approximately $110 million by focusing on ground leasing or selling to end users as well as modifying the scope of our development projects.

Finally, as of June 30, 2009, we also owned interests in other land parcels comprising approximately 95 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 Economic Conditions and Impact on Our Retail Tenants

Our business continues to feel the effects of the extended turmoil in the U.S credit markets and the overall softening of the economic environment. We expect the difficult economic conditions that have significantly restricted consumer spending to continue throughout 2009 and likely beyond. The U.S. Congress, the Presidential Administration and the Federal Reserve Bank have taken various steps, including establishing various stimulus packages and governmental monetary packages, in an effort to curtail the recession and promote stability in the U.S. economy as a whole. It is not yet clear what effect, if any, these actions will have on banks and other financial institutions, the broader financial and credit markets and the economy in general.

Factors contributing to consumers spending less at stores owned and/or operated by our retail tenants include, among others:

† Shortage of Financing: Lending institutions have substantially tightened credit standards, making it significantly more difficult for individuals and companies to obtain financing. The shortage of financing has caused, among other things, consumers to have less disposable income available for retail spending.

† Decreased Home Values and Increased Home Foreclosures: U.S. home values have decreased sharply, and difficult economic conditions have also contributed to a record number of home foreclosures. The historically high level of delinquencies and foreclosures, particularly among sub-prime mortgage borrowers, may continue into the foreseeable future.

† Rising Unemployment Rates: The U.S. unemployment rate continues to rise dramatically. According to the Bureau of Labor Statistics, by the end of the second quarter of 2009, approximately 14.7 million, or 9.5%, of Americans were unemployed, the highest level in 26 years. Rising unemployment rates could cause further decreases in consumer spending, thereby negatively affecting the businesses of our retail tenants.

† Decreasing Consumer Confidence: Consumer confidence is at its lowest level in decades, leading to a decline in spending on discretionary purchases. In the second quarter of 2009, consumer spending declined 1.2% while the savings rate rose to 5.2%, the highest it has been since 1998. In addition, the significant increase in personal and business bankruptcies reflects an economy in distress, with financially over-extended consumers less likely to purchase goods and/or services from our retail tenants.

As discussed below, these conditions damage the businesses of our retail tenants and in turn have a negative impact on our business. To the extent these conditions persist or deteriorate further, our tenants may be required to curtail or cease their operations, which could materially and negatively affect our business in general and our cash flows in particular.

Impact of Economy on REITs, Including Us

As an owner and developer of community and neighborhood shopping centers, our operating and financial performance is directly affected by economic conditions in the retail sector of those markets in which our operating centers and development properties are located. This is particularly true in the states of Indiana, Florida and Texas, where the majority of our properties are located, and in North Carolina, where a significant portion of our development projects and land parcels held for development are located. As discussed above, due to the challenges facing U.S. consumers, the operations of our retail tenants are being negatively affected. In turn, this is having a negative impact on our business, including in the following ways:

† Difficulty In Collecting Rent; Rent Adjustments. When consumers spend less, our tenants typically experience decreased revenues and cash flows. This makes it more difficult for some of our tenants to pay their rent obligations, which is the primary source of our revenues. A number of tenants requested decreases or deferrals in their rent obligation in the first half of 2009. Some of these requests have been granted in order to assist our tenants through the current economic difficulties, which will negatively affect our cash flows in the short-term. In addition, we have increased our allowance for doubtful accounts as we anticipate having more difficulty in collecting rent receivables.

† Termination of Leases. If our tenants continue to struggle to meet their rental obligations, they may be forced to vacate their stores and terminate their leases with us. During the first half of 2009, several tenants vacated their stores, and in some cases, terminated their leases with us. When tenants terminate their leases with us, we may be able to negotiate lease termination fees from them but in other cases we may not.

† Tenant Bankruptcies. The number of bankruptcies by U.S. businesses surged in the latter part of 2008. This trend continued through the first half of 2009 and may continue into the foreseeable future. Likewise, bankruptcies of our retail tenants also increased sharply in 2008 and into 2009. For example, in late 2008, Circuit City Stores, Inc. filed a petition for bankruptcy protection under Chapter 11 of the federal bankruptcy laws and, in early 2009, declared that it would be liquidating and closing all of its stores. At that time, Circuit City operated stores at three of our properties, and in March 2009 they ceased operations and closed those stores.

† Decrease in Demand for Retail Space. Reflecting the extremely difficult current market conditions, demand for retail space at our shopping centers has decreased while availability has increased due to tenant terminations and bankruptcies. The excess capacity generated by big box tenant bankruptcies has led to increased competition to lease these spaces and downward pressure on rental rates. Overall tenancy at our shopping centers declined over the last 12 months and may continue to decline in the future until financial markets, consumer confidence, the unemployment rate and the economy in general stabilize and begin to improve. As of June 30, 2009, our retail operating portfolio was approximately 91% leased compared to approximately 93% leased as of June 30, 2008. In addition, these conditions have made it significantly more difficult for us to lease space in our development projects, which may adversely affect the expected returns from these projects or delay their completion.

† Decrease in Third Party Construction Activity. As a reflection of the various economic and other factors previously discussed, we are anticipating a general decline in third party construction activity in the foreseeable future, which could have a negative impact on the revenues of our development, construction and advisory services segment.

The factors discussed above, among others, continued to have a negative impact on our business in the second quarter of 2009. We expect that these conditions will continue into the foreseeable future.

Financing Strategy and 2009 Maturities

Our ability to obtain financing on satisfactory terms and to refinance borrowings as they mature has also been affected by the condition of the economy in general and by the current instability of the financial markets in particular. As of June 30, 2009, approximately $29 million of our consolidated indebtedness was scheduled to mature in the remainder of 2009 (approximately $31 million including our share of unconsolidated debt), including scheduled monthly principal payments for the remainder of 2009. We believe we have good relationships with a number of banks and other financial institutions that will allow us an opportunity to refinance these borrowings with the existing lenders or replacement lenders. However, in this current challenging environment, it is imperative that we identify alternative sources of financing and other capital in the event we are not able to refinance these loans on satisfactory terms, or at all. It is also important for us to obtain financing in order to complete our development and redevelopment projects.

We engaged in a number of financing and refinancing activities in the second quarter of 2009. In May, we paid down approximately $57 million on our unsecured revolving credit facility using proceeds from our common share offering. Also in May, we placed $15.4 million of permanent financing on our Eastgate Pavilion shopping center, a previously unencumbered property. This variable rate loan bears interest at LIBOR plus 295 basis points and matures in April, 2012. In June, we refinanced the $44.5 million construction loan on our Cobblestone Plaza property with a variable rate loan that bears interest at LIBOR plus 250 basis points and matures in March, 2010. Also in June, we refinanced the $4.1 million loan on our Fishers Station property with a loan bearing interest at LIBOR plus 350 basis points and maturing in June 2011. Also in June, we extended the maturity date of the $9.4 million Delray Marketplace construction loan from July 2009 to June 2011. As of June 30, 2009, approximately $56 million was available to be drawn under our unsecured revolving credit facility.

As part of our financing strategy, we will continue to seek to refinance and/or extend our debt that is maturing in 2009 and 2010. While we can give no assurance, due to these efforts and the current status of negotiations with existing and alternative lenders for our near-term maturing indebtedness, we currently believe we will have the ability to extend, refinance, or repay all of our debt that is maturing through at least 2009, including, to the extent necessary, utilizing the availability on our unsecured revolving credit facility.

Obtaining new financing is also important to our business due to the capital needs of our existing development and redevelopment projects. The properties in our development and redevelopment pipelines, which are primary drivers for our near-term growth, will require a substantial amount of capital to complete. As of June 30, 2009, our unfunded share of the total estimated cost of the properties in our current development and redevelopment pipelines was approximately $29 million. While we believe we will have access to sufficient resources to be able to fund our investments in these projects through a combination of our $57.3 million in cash and cash equivalents, new and existing construction loans and draws on our unsecured credit facility (which, as noted above, had $56 million of availability as of June 30, 2009), a prolonged credit crisis will make it more costly and difficult to raise additional capital, if necessary.

Critical Accounting Policies and Estimates

Our critical accounting policies as discussed in our 2008 Annual Report on Form 10-K have not materially changed during the first six months of 2009. See Notes 2 and 10 to the condensed consolidated financial statements in Item 1 of this report for a summary of significant accounting policies and recent accounting pronouncements.

Results of Operations

At June 30, 2009, we owned interests in 55 operating properties (consisting of 51 retail properties, three operating commercial properties and an associated parking garage) and eight entities that held interests in development or redevelopment properties. Of the 63 total properties held at June 30, 2009, one operating property and one parcel of pre-development land were owned through joint ventures and accounted for under the equity method.

At June 30, 2008, we owned interests in 56 operating properties (consisting of 51 retail properties, four operating commercial properties and an associated parking garage) and 11 entities that held interests in development or redevelopment properties. Of the 67 total properties held at June 30, 2008, two operating properties and one parcel of pre-development land were owned through joint ventures and accounted for under the equity method.

The comparability of results of operations is significantly affected by our development, redevelopment, and operating property acquisition and disposition activities in 2008 and 2009. Therefore, we believe it is most useful to review the comparisons of our 2008 and 2009 results of operations (as set forth below under "Comparison of Operating Results for the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008" and "Comparison of Operating Results for the Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008") in conjunction with the discussion of our significant development, redevelopment, and operating property acquisition and disposition activities during those periods, which is set forth directly below.

Development Activities



The following development properties were in our current development pipeline
and were operational or partially operational at various times from January 1,
2008 through June 30, 2009:



                                                  Economic Occupancy
Property Name                     MSA                  Date(1)            Owned GLA

Cobblestone Plaza          Ft. Lauderdale, FL    March 2009                   157,957
54th & College             Indianapolis, IN      June 2008                        N/A (2)
Bayport Commons            Tampa, FL             September 2007                94,756
Tarpon Springs Plaza       Naples, FL            July 2007                     82,546
Gateway Shopping Center    Marysville, WA        April 2007                   100,949

(2) Property is ground leased to a single tenant.

Property Acquisition Activities

In February 2008, we purchased Rivers Edge, a 110,875 square foot shopping center located in Indianapolis, Indiana, for $18.3 million. We utilized approximately $2.7 million of proceeds from the November 2007 sale of our 176th & Meridian property in a like-kind exchange under Section 1031 of the Internal Revenue Code. The remaining purchase price of $15.6 million was funded initially through a draw on our unsecured revolving credit facility and subsequently refinanced with a variable rate loan bearing interest at LIBOR plus 125 basis points and maturing on February 3, 2010. This property was purchased with the intent to redevelop; therefore, it is included in our redevelopment pipeline, as shown in the "Redevelopment Activities" table below. However, for purposes of the comparison of operating results, this property is classified as property acquired during 2008 in the comparison of operating results tables below.

Operating Property Disposition Activities



The following operating properties were sold from January 1, 2008 through
June 30, 2009:



Property Name                               MSA             Disposition Date     Owned GLA

Spring Mill Medical, Phase I(1)    Indianapolis, Indiana    December 2008            63,431
Silver Glen Crossing               Chicago, Illinois        December 2008           132,716

Redevelopment Activities

The following properties were in our redevelopment pipeline at various times during the period from January 1, 2008 through June 30, 2009:

Property Name                       MSA              Transition Date(1)   Owned GLA

Coral Springs Plaza       Ft. Lauderdale, Florida    March 2009              94,756
Galleria Plaza            Dallas, Texas              March 2009              44,306
Courthouse Shadows        Naples, Florida            September 2008         134,867
Four Corner Square        Maple Valley, Washington   September 2008          73,099
Bolton Plaza              Jacksonville, Florida      June 2008              172,938
Rivers Edge               Indianapolis, Indiana      June 2008              110,875
Glendale Town Center(2)   Indianapolis, Indiana      March 2007             685,000
Shops at Eagle Creek(3)   Naples, Florida            December 2006           75,944

(2) Property was transitioned back into the operating portfolio in the third quarter of 2008 as redevelopment was substantially completed. However, because the property was under redevelopment during the first half of 2008, it is classified as such in the comparison of operating results tables below.

(3) Property was transitioned back into the operating portfolio in the first quarter of 2009 as redevelopment was substantially completed. However, because the property was under redevelopment during 2008, it is classified as such in the comparison of operating results tables below.

Comparison of Operating Results for the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008

The following table reflects our consolidated statements of operations for the three months ended June 30, 2009 and 2008 (unaudited):

                                                                            Increase
                                                                           (Decrease)
                                              2009            2008        2009 to 2008
Revenue:
Rental income (including tenant
reimbursements)                           $ 22,616,562    $ 22,874,118    $    (257,556 )
Other property related revenue               1,770,070       2,974,507       (1,204,437 )
Construction and service fee revenue         5,762,463       8,311,318       (2,548,855 )
Total Revenue                               30,149,095      34,159,943       (4,010,848 )
Expenses:
Property operating expense                   4,098,494       3,924,055          174,439
Real estate taxes                            3,603,116       3,246,816          356,300
Cost of construction and services            5,017,734       7,024,400       (2,006,666 )
General, administrative, and other           1,547,357       1,259,408          287,949
Depreciation and amortization                8,728,789       8,348,003          380,786
Total Expenses                              22,995,490      23,802,682         (807,192 )
Operating income                             7,153,605      10,357,261       (3,203,656 )
Add:
Other income, net                               35,622          31,676            3,946
Income from unconsolidated entities            121,017          86,121           34,896
Deduct:
Interest expense                             6,991,624       7,351,499         (359,875 )
Income tax expense of taxable REIT
subsidiary                                      13,233         251,858         (238,625 )
Income from continuing operations              305,387       2,871,701       (2,566,314 )
Operating income from discontinued
operations                                           -         305,041         (305,041 )
Consolidated net income                        305,387       3,176,742       (2,871,355 )
Net income attributable to
noncontrolling interests                       (48,302 )      (717,453 )        669,151
Net income attributable to Kite Realty
Group Trust                               $    257,085    $  2,459,289    $  (2,202,204 )

Rental income (including tenant reimbursements) decreased approximately $0.3 million, or 1%, due to the following:

                                                                     Increase
                                                                    (Decrease)
                                                                   2009 to 2008
Properties fully operational during 2008 and 2009 & other         $      (231,423 )
Development properties that became operational or were
partially operational in 2008 and/or 2009                                 901,063
Property acquired during 2008                                             (64,814 )
Properties under redevelopment during 2008 and/or 2009                   (862,382 )
Total                                                             $      (257,556 )

Excluding the changes due to transitioned development properties, the acquisition of a property, and the properties under redevelopment, the net $0.2 million decrease in rental income was primarily due to a $0.5 million decrease due to termination of big box tenants at three of our properties and smaller tenants at several other properties in 2008 and the second quarter of 2009, offset by a $0.2 million increase in real estate tax recoveries due to 2008 real estate tax refunds at several of our operating properties.

Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on land sales. This revenue decreased approximately $1.2 million, or 40%, as a result of a decrease of $1.3 million in gains on land sales and a $0.3 million decrease in lease termination income, offset by a $0.4 million reversal of an estimated liability for which the Company is no longer obligated.

Construction revenue and service fees decreased approximately $2.5 million, or 31%, primarily as a result of a decline in third party construction contracts due to the economic downturn and our decision to temporarily slow our third party construction activity.

Property operating expenses increased approximately $0.2 million, or 4%, due to the following:

                                                                      Increase
                                                                   (Decrease) 2009
                                                                       to 2008
Properties fully operational during 2008 and 2009 & other         $         (93,081 )
Development properties that became operational or were
partially operational in 2008 and/or 2009                                    51,459
Property acquired during 2008                                                17,882
Properties under redevelopment during 2008 and/or 2009                      198,179
Total                                                             $         174,439

Excluding the changes due to transitioned development properties, the acquisition of a property, and the properties under redevelopment, the net $0.1 million decrease in property operating expenses was primarily due to a $0.3 million decrease in several categories of operating expenses, including repairs, maintenance and nonrecoverable legal and other costs, offset by a $0.2 million increase in bad debt expense at a number of our operating properties.

Real estate taxes increased approximately $0.4 million, or 11%, due to the following:

                                                                      Increase
                                                                   (Decrease) 2009
                                                                       to 2008
Properties fully operational during 2008 and 2009 & other         $         716,598
Development properties that became operational or were
partially operational in 2008 and/or 2009                                   145,930
Property acquired during 2008                                               (47,491 )
. . .