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KRG > SEC Filings for KRG > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for KITE REALTY GROUP TRUST


8-Aug-2013

Quarterly Report

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.

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, 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 leases at our properties. Our operating results therefore depend materially on the ability of our tenants to make required rental payments, conditions in the United States retail sector, and overall economic and real estate market conditions.

At June 30, 2013, we owned interests in 63 properties consisting of 57 retail operating properties, four retail properties under redevelopment, and two commercial operating properties. As of this date, we also owned interests in four development properties under construction.

In addition to our developments and redevelopments under construction, we have one development project pending construction commencement, which is undergoing pre-leasing activity and negotiations for third party financing. This project is expected to contain 0.2 million square feet of total gross leasable area upon completion.

Finally, as of June 30, 2013, we also owned interests in other land parcels comprising 134 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 consolidated balance sheets.

Current Business Environment

Certain elements of the U.S. economy continued to slowly recover during the second quarter of 2013. The economy continued to create jobs at a consistent level including 165,000 jobs in June and 175,000 in May. However, manufacturing industries overall have been slow to reap the benefits of growing U.S. demand as China and European markets continue to show weakness. Additionally, new-home sales reach a five-year high in May and business investment plans improved for a third straight month. Meanwhile, the housing sector has continued to demonstrate positive momentum as the U.S. Federal Reserve low interest-rate policies have encouraged more Americans to buy homes and cars.

As noted above, the prospect of a prolonged economic recovery continues to be uncertain. In the face of this uncertainty, however, some retailers are considering limited expansion of their businesses and in certain cases have expressed optimism through expansion plans and capital allocation decisions. Where prudent and consistent with our strategy, we will seek to capitalize on our relationships with tenants to maximize our growth. We believe there will continue to be additional leasing opportunities during 2013 and 2014 as tenants seek to lease new space or renew existing space in connection with lease expirations, expansions, and other considerations.

The lingering overall weakness and uncertainty in the U.S. economy has led to conditions that may continue to impact our business in a number of ways, including soft consumer demand; increasing tenant bankruptcies; curtailment of certain of our tenants' operations; delays or postponements 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; the possible need to outlay additional capital to assist a tenant in the opening of its business; and termination by our tenants of their leases with us.

Ongoing Actions Taken to Capitalize on the Current Business Environment

During the current quarter, we continued to execute on our strategy to maximize shareholder value, including:

Acquisition, Development, and Redevelopment Activities: On April 23, 2013, the Company acquired Cool Springs Market in Nashville, Tennessee. Cool Springs Market is 95% leased and is anchored by Dick's Sporting Goods, Marshall's, JoAnn Fabrics, Staples, and a non-owned Kroger. The purchase price, exclusive of closing costs, was $37.6 million.


On May 1, 2013, the Company acquired Castleton Crossing in Indianapolis, Indiana. Castleton Crossing is 100% leased and is anchored by TJ Maxx, HomeGoods, Burlington Coat Factory, and Shoe Carnival. The purchase price, exclusive of closing costs, was $39.0 million.

During the quarter, the Company completed the grand opening of the primary anchor Earth Fare at Rangeline Crossing near Indianapolis, Indiana. As of June 30, 2013, the project is 91.7% leased.

Access the Capital Markets. In the current quarter, the Company completed a public equity offering of 15,525,000 common shares at an offering price of $6.55 per share under a previously filed registration statement, for net offering proceeds of approximately $97.2 million. These proceeds were initially used to repay outstanding indebtedness under the Company's unsecured revolving credit facility. The majority of the net proceeds were used or redeployed to acquire Cool Springs Market and Castleton Crossing.

Continued Focus on Operations. We continued to execute on our operating and leasing strategy. During the current quarter, we executed new and renewal leases totaling 106,000 square feet and improved the net operating income of our operating retail properties. Our same property net operating income improved 4.4% compared to the quarter ended June 30, 2012, due to improved occupancy levels and improved expense recoveries.

Results of Operations

At June 30, 2013, we owned interests in 63 properties consisting of 57 retail operating properties, four retail properties under redevelopment, and two operating commercial properties. As of this date, we also owned interests in four retail development properties under construction.

At June 30, 2012, we owned interests in 62 properties consisting of 53 retail operating properties, five retail properties under redevelopment, and four operating commercial properties. As of this date, we also owned interests in four retail development properties that were under construction.

The comparability of results of operations in 2012 and 2013 is affected by our development, redevelopment, and operating property acquisition and disposition activities during these periods. Therefore, we believe it is useful to review the comparisons of our results of operations for these periods in conjunction with the discussion of these activities during those periods, which is set forth below.

Development Activities

The following development properties were partially operational at various times
from January 1, 2012 through June 30, 2013:

                                                 Economic
                                                Occupancy
    Property Name               MSA               Date1        Owned GLA

Cobblestone Plaza2       Ft. Lauderdale, FL   March 2009         133,214
DePauw University
Bookstore & Café         Greencastle, IN      September 2012      11,974
Zionsville Walgreens     Indianapolis, IN     September 2012      14,550
Delray Marketplace       Delray Beach, FL     January 2013       255,554
Holly Springs Towne
Center - Phase I         Raleigh, NC          March 2013         204,936

1 Represents the date on which we started receiving rental payments under tenant leases or ground leases at the property or the tenant took possession of the property, whichever was earlier.

2 Construction of this property was completed in phases. The Economic Occupancy Date indicated for this property refers to its initial phase.


Property Acquisition Activities

The following properties were acquired between January 1, 2012 and June 30,
2013:

  Property                                            Acquisition Costs
    Name             MSA          Acquisition Date       (Millions)        Owned GLA

Cove Center    Stuart, FL         June 2012          $              22.1     154,696
12th Street                                                         15.2
Plaza          Vero Beach, FL     July 2012                                  138,268
Publix at                                                            9.1
Woodruff       Greenville, SC     December 2012                               68,055
Shoppes at                                                          28.8
Plaza Green    Greenville, SC     December 2012                              195,258
Shoppes of                                                          11.6
Eastwood       Orlando, FL        January 2013                                69,037
Cool Springs                                                        37.6
Market         Nashville, TN      April 2013                                 223,912
Castleton                                                           39.0
Crossing       Indianapolis, IN   May 2013                                   277,812

Property Disposition Activities

In 2012, we were able to effectively recycle capital by selling the following properties:

ˇ Gateway Shopping Center near Seattle, Washington in February 2012;

ˇ South Elgin Commons near Chicago, Illinois in June 2012;

ˇ 50 South Morton near Indianapolis, Indiana in July 2012;

ˇ Coral Springs Plaza in Fort Lauderdale, Florida in September 2012;

ˇ Pen Products in Indianapolis, Indiana in October 2012;

ˇ Indiana State Motor Pool in Indianapolis, Indiana in October 2012;

ˇ Zionsville Shops near Indianapolis, Indiana in November 2012;

ˇ Sandifur Plaza in Pasco, Washington in November 2012; and

ˇ Preston Commons and an adjacent land parcel in Dallas, Texas in December 2012.

Redevelopment Activities

The following properties were in redevelopment status at various times during
the period from January 1, 2012 through June 30, 2013:

                                                           Transition
                                         Transition to        from
                                         Redevelopment   Redevelopment
   Property Name            MSA            Pipeline1       Pipeline1      Owned GLA

                                         September
Courthouse Shadows    Naples, Florida    2008            Pending            134,867
                      Maple Valley,      September
Four Corner Square2   Washington         2008            Pending            108,523
                      Jacksonville,
Bolton Plaza3         Florida            June 2008       Pending            155,637
                      Wilmington,
Oleander Place        North Carolina     March 2011      December 2012       45,530
Rangeline Crossing    Carmel, Indiana    June 2012       June 2013           73,625
                      Gainesville,
Gainesville Plaza     Florida            June 2013       Pending            177,826



1 Transition date represents the date the property was transferred from our operating portfolio to our redevelopment projects.
2 This property is currently a redevelopment under construction. This $27.5 million project partially opened in the 1st quarter of 2013 and is currently 87% leased.
3 This property is currently a redevelopment under construction. The L.A. Fitness portion of this $10.3 million project is scheduled to open in the first half of 2014 and the entire project is currently 89% leased.


Same Property Net Operating Income

The Company believes that net operating income ("NOI") is helpful to investors as a measure of its operating performance because it excludes various items included in net income that do not relate to or are not indicative of its operating performance, such as depreciation and amortization, interest expense, and impairment, if any. The Company believes that NOI for our "same properties" ("Same Property NOI") is helpful to investors as a measure of its operating performance because it includes only the NOI of properties that have been owned for the full periods presented, which eliminates disparities in net income due to the redevelopment, acquisition or disposition of properties during the particular period presented, and thus provides a more consistent metric for the comparison of the Company's properties. NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of the Company's financial performance.

The following table reflects same property net operating income (and reconciliation to net loss attributable to common shareholders) for the three and six months ended June 30, 2013 and 2012:

                               Three Months Ended June 30,                 Six Months Ended June 30,
                             2013            2012        % Change       2013            2012        % Change
Number of properties at                                                        49              49
period end1                         49              49

Leased percentage at
period-end                       95.1%           92.8%                      95.1%           92.8%

Net operating income -
same properties (49
properties)2             $  15,230,535   $  14,583,188        4.4 % $  30,286,355   $  28,894,876        4.8 %

Reconciliation to Most
Directly Comparable GAAP
Measure:

Net operating income -                                              $
same properties          $  15,230,535   $  14,583,188                 30,286,355   $  28,894,876
Net operating income -
non-same properties          7,011,826       2,455,901                 15,140,732       4,926,300
Other (expense) income,                                                                           )
net                           (143,867 )        50,877                    (67,981 )        (9,045
General, administrative                                                                           )
and acquisition expenses    (2,052,553 )    (1,863,405 )               (4,371,065 )    (3,685,110
Litigation charge                    ?               ?                          ?      (1,289,446 )
Impairment charge           (5,371,428 )             ?                 (5,371,428 )             ?
Depreciation expense       (14,175,797 )   (10,211,245 )              (25,929,354 )   (19,360,081 )
Interest expense            (7,752,529 )    (6,303,413 )              (14,884,304 )   (12,682,630 )
Discontinued operations              ?         319,348                          ?         728,156
Gain on sale of
operating property                   ?          93,891                          ?       5,245,880
Net loss (income)
attributable to
noncontrolling interests       661,009         271,221                    636,155      (1,825,799 )
Dividends on preferred                                                                            )
shares                      (2,114,063 )    (2,114,063 )               (4,228,125 )    (3,691,876
Net loss attributable to                                            $                             )
common shareholders      $  (8,706,867 ) $  (2,717,700 )               (8,789,015 ) $  (2,748,775

1 Same Property analysis excludes operating properties in redevelopment.

2 Excludes net gains from outlot sales, straight-line rent, bad debt expense, lease termination fees and amortization of lease intangibles.

Comparison of Operating Results for the Three Months Ended June 30, 2013 to the Three Months Ended June 30, 2012

The following table reflects our consolidated statements of operations for the three months ended June 30, 2013 and 2012 (unaudited):


                                                                                         Net change
                                                         2013             2012          2012 to 2013
Revenue:
  Rental income (including tenant reimbursements)    $ 29,254,246     $ 23,302,712     $    5,951,534
  Other property related revenue                        1,730,470          863,847            866,623
Total revenue                                          30,984,716       24,166,559          6,818,157
Expenses:
  Property operating                                    5,185,362        4,098,793          1,086,569
  Real estate taxes                                     3,556,993        3,028,677            528,316
  General, administrative, and other                    1,815,940        1,792,472             23,468
  Acquisition costs                                       236,613           70,933            165,680
  Impairment charge                                     5,371,428                -          5,371,428
  Depreciation and amortization                        14,175,797       10,211,245          3,964,552
Total Expenses                                         30,342,133       19,202,120         11,140,013
Operating income                                          642,583        4,964,439         (4,321,856 )
  Interest expense                                     (7,752,529 )     (6,303,413 )       (1,449,116 )
  Income tax (expense) benefit of taxable REIT
subsidiary                                               (104,833 )         30,174           (135,007 )
  Other (expense) income, net                             (39,034 )         20,703            (59,737 )
Loss from continuing operations                        (7,253,813 )     (1,288,097 )       (5,965,716 )
Discontinued operations:
  Discontinued operations                                       -          319,348           (319,348 )
  Gain on sale of operating property, net of tax
expense                                                         -           93,891            (93,891 )
Income from discontinued operations                             -          413,239           (413,239 )
Consolidated net loss                                  (7,253,813 )       (874,858 )       (6,378,955 )
  Net loss attributable to noncontrolling
interests                                                 661,009          271,221            389,788
Net loss attributable to Kite Realty Group
  Trust                                                (6,592,804 )       (603,637 )       (5,989,167 )
Dividends on preferred shares                          (2,114,063 )     (2,114,063 )                -
Net loss attributable to common shareholders         $ (8,706,867 )   $ (2,717,700 )   $   (5,989,167 )

Rental income (including tenant reimbursements) increased $6.0 million, or 25.5%, due to the following:

                                                                          Net change
                                                                         2012 to 2013
Development properties that became operational or were
partially operational in 2012 and/or 2013                                $   1,733,437
Properties acquired during 2012 and 2013                                     3,447,782
Properties under redevelopment during 2012 and/or 2013                         349,399
Properties fully operational during 2012 and 2013 and other                    420,916
Total                                                                    $   5,951,534

Excluding the changes due to transitioned development properties, acquired properties and the properties under redevelopment, the net $0.4 million increase in rental income is primarily attributable to improvement in occupancy and recoveries from tenants. The leased percentage of the retail operating portfolio was 95.4% as of June 30, 2013, as compared to the leased percentage of 93.0% as of June 30, 2012. For the total portfolio and excluding the effect of bad debt, legal and other nonrecoverable expenses, the overall recovery ratio for reimbursable expenses improved to 79% for the three months ended June 30, 2013 compared to 76% for the three months ended June 30, 2012.

Other property related revenue primarily consists of parking revenues, overage rent, lease settlement income and gains related to land sales. This revenue increased primarily as a result of higher gains on land sales of $0.7 million.


Property operating expenses increased $1.1 million, or 26.5%, due to the following:

                                                                          Net change
                                                                         2012 to 2013
Development properties that became operational or were
partially operational in 2012 and/or 2013                                $     496,424
Properties acquired during 2012 and 2013                                       393,863
Properties under redevelopment during 2012 and/or 2013                          36,229
Properties fully operational during 2012 and 2013 and other                    160,053
Total                                                                    $   1,086,569

Excluding the changes due to transitioned development properties, acquired properties, and the properties under redevelopment, the net $0.2 million increase in property operating expenses relates primarily to an increase in insurance and repairs and maintenance costs partially offset by a decrease in bad debt expense.

Real estate taxes increased $0.5 million, or 17.4%, due to the following:

                                                                         Net change
                                                                           2012 to
                                                                            2013
Development properties that became operational or were
partially operational in 2012 and/or 2013                                $    17,593
Properties acquired during 2012 and 2013                                     388,759
Properties under redevelopment during 2012 and/or 2013                        33,294
Properties fully operational during 2012 and 2013 and other                   88,670
Total                                                                    $   528,316

Excluding the changes due to transitioned development properties, acquired properties and the properties under redevelopment, the net $0.1 million increase in real estate taxes was primarily due to higher assessments at certain of our operating properties. The majority of changes in our real estate tax expense is recoverable from (or reimbursable to) tenants and, therefore, reflected in tenant reimbursement revenue.

Acquisition costs related to recent activity were $0.2 million for the three months ended June 30, 2013 compared to $0.1 million for the three months ended June 30, 2012 due to higher acquisition volume.

The Company recorded an impairment charge of $5.4 million related to our Kedron Village operating property for the three months ended June 30, 2013. See additional discussion in Note 12 to the consolidated financial statements.

Depreciation and amortization expense increased $4.0 million, or 38.8%, due to the following:

                                                                          Net change
                                                                         2012 to 2013
Development properties that became operational or were
partially operational in 2012 and/or 2013                                $     821,815
Properties acquired during 2012 and 2013                                     2,347,738
Properties under redevelopment during 2012 and/or 2013                         368,388
Properties fully operational during 2012 and 2013 and other                    426,611
Total                                                                    $   3,964,552

The overall increase of $4.0 million in depreciation and amortization expense was due to the following significant items:


ˇ A decrease of $0.5 million mainly due to accelerated depreciation during the second quarter of 2012 related to the demolition of a portion of the Four Corner Square redevelopment.A redevelopment plan for this property was finalized during the first quarter of 2012, resulting in a reduction of theuseful lives of certain assets that were demolished.

ˇ An increase of $0.8 million related to tenants opening at recently completed development and redevelopmentproperties including Delray Marketplace and Holly Springs Towne Center.

ˇ An increase of $2.3 million related to 2012 and 2013 acquisitions.

ˇ An increase of $1.6 million mainly due to accelerated depreciation related to the demolition of a portion of the Bolton Plaza redevelopment. A redevelopment plan for this property was finalized during the first quarter of 2013, resulting in a reduction of the useful lives of certain assets that were demolished.

Interest expense increased $1.4 million, or 23.0%. The increase was due to the transfer of substantial portions of assets at Delray Marketplace, Holly Springs Towne Centre - Phase I, and Four Corner Square from construction in progress to depreciable fixed assets, which resulted in a reduction in capitalized interest. The remainder of the increase was due to $0.3 million of accrued default interest on a $29.5 million non-recourse loan secured by the Kedron Village operating property (See Note 12).

The Company had income related to discontinued operations of $0.4 million for the three months ended June 30, 2012 related to 2012 dispositions noted above, while there was no comparable activity for the three months ended June 30, 2013. The Company sold South Elgin Commons near Chicago, Illinois for a net gain of $0.1 million during the three months ended June 30, 2012.

Comparison of Operating Results for the Six Months Ended June 30, 2013 to the
Six Months Ended June 30, 2012

The following table reflects our consolidated statements of operations for the
six months ended June 30, 2013 and 2012 (unaudited):


                                                                                           Net change
                                                         2013              2012           2012 to 2013
Revenue:
  Rental income (including tenant reimbursements)    $  56,321,562     $  46,873,833     $    9,447,729
  Other property related revenue                         6,736,270         2,082,727          4,653,543
Total revenue                                           63,057,832        48,956,560         14,101,272
Expenses:
  Property operating                                    10,455,617         8,592,644          1,862,973
  Real estate taxes                                      7,175,128         6,542,740            632,388
  General, administrative, and other                     3,957,553         3,614,177            343,376
. . .
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