Note 5. Mortgage and Other Indebtedness
Mortgage and other indebtedness consisted of the following at September 30, 2009 and December 31, 2008:
Consolidated indebtedness, including weighted average maturities and weighted average interest rates at September 30, 2009, 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 350 basis points. At September 30, 2009, the one-month LIBOR interest rate was 0.25%. Fixed interest rates on mortgage loans range from 5.11% to 7.65%.
For the nine months ended September 30, 2009, the Company had loan borrowings of $74.0 million and loan repayments of $91.2 million. The major components of this activity are as follows:
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, 2009, the Company has 52 unencumbered properties and other assets used to calculate the value of the unencumbered property pool, of which 49 are wholly owned and three of which are owned through joint ventures. The major unencumbered assets include: Broadstone Station, Courthouse Shadows, Four Corner Square, Hamilton Crossing, King's Lake Square, Market Street Village, Naperville Marketplace, PEN Products, Publix at Acworth, Red Bank Commons, Ridge Plaza, Shops at Eagle Creek, Traders Point II, Union Station Parking Garage, Wal-Mart Plaza, and Waterford Lakes. As of September 30, 2009, the total amount available for borrowing under the unsecured credit facility was approximately $69.5 million.
As of September 30, 2009, the fair value of fixed rate debt was approximately $323.2 million compared to the book value of $313.4 million. The fair value was estimated using cash flows discounted at current borrowing rates for similar instruments which ranged from 3.13% to 5.94%. As of September 30, 2009, the fair value of variable rate debt was approximately $342.8 million compared to the book value of $345.7 million. The fair value was estimated using cash flows discounted at current borrowing rates for similar instruments which ranged from 4.50% to 6.50%.
Note 6. Shareholders’ Equity
On September 15, 2009, the Company’s Board of Trustees declared a cash distribution of $0.06 per common share for the third quarter of 2009. 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 16, 2009 to shareholders and unitholders of record as of October 7, 2009.
In February and March 2009, the Compensation Committee of the Company’s Board of Trustees approved a long-term equity incentive compensation award of a total of approximately 527,000 share options to management and other employees, the value of which was determined using the Black-Scholes valuation methodology. These share options were issued with exercise prices ranging from $2.64 to $3.56 and will vest ratably over five years beginning on the first anniversary date of the grant.
Note 7. Derivative Instruments, Hedging Activities and Other Comprehensive Income
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and the creditworthiness of both the Company and the counterparty.
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the provision 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 that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that a company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. 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.
To comply with the provision, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The only assets or liabilities that the Company records at fair value on a recurring basis are interest rate hedge agreements. The fair value of the Company’s interest rate hedge liabilities as of September 30, 2009 was approximately $8.0 million, including accrued interest of approximately $0.4 million, which is recorded in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet.
Note 8. Segment Data
The operations of the Company are aligned into two business segments: (1) real estate operation and (2) development, construction and advisory services. Segment data of the Company for the three and nine months ended September 30, 2009 and 2008 are as follows:
Note 9. Commitments and Contingencies
Phase I of Eddy Street Commons at the University of Notre Dame, located adjacent to the University in South Bend, Indiana is one of the Company’s current major development pipeline projects. This multi-phase project, when completed, is expected to include retail, office, hotels, a parking garage, apartments and residential units. The Company will own the retail and office components while other components are expected to be owned by third parties or through joint ventures. 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 are being used for the construction of a parking garage and infrastructure improvements to this project. The first retail tenants at this development property opened for business in September 2009.
The Company is not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than routine litigation, claims and administrative proceedings arising in the ordinary course of business. Management believes that such routine litigation, claims and administrative proceedings will not have a material adverse impact on the Company’s condensed consolidated financial statements.
As of September 30, 2009, the Company had outstanding letters of credit totaling $6.8 million, approximately $1.6 million of which all requirements have been satisfied as of that date. At that date, there were no amounts advanced against these instruments.
Note 10. Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which was primarily codified into Topic 805 – “Business Combinations” in the ASC. This provision requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. The provision is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company’s adoption of this guidance on January 1, 2009 did not have a material impact on its condensed consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157” which permitted a one-year deferral for the implementation of SFAS 157 with regard to nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS 157 and the related FSPs were primarily codified into Topic 820 – “Fair Value Measurements and Disclosures” in the ASC. On January 1, 2009, the Company adopted the provisions related to nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis, and the adoption did not have a material impact on its condensed consolidated financial statements.
On January 1, 2009, the Company adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which was primarily codified into Topic 260 – “Earnings Per Share” in the ASC. This provision states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of this provision did not have a material impact on reported earnings per share.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which requires (i) disclosure of the fair value of all financial instruments for which it is practicable to estimate that value in interim period financial statements as well as in annual financial statements, (ii) that the fair value information be presented together with the related carrying amount of the asset or liability, and (iii) disclosure of the methods and significant assumptions used to estimate the fair value and changes, if any, to the methods and significant assumptions used during the period. This provision was primarily codified into Topic 820 – “Fair Value Measurements and Disclosures” in the ASC. It is effective for interim periods ending after June 15, 2009, and requires additional disclosures in interim periods which were previously only required in annual financial statements. The Company adopted this provision in the second quarter of 2009 and the required disclosure is presented in Note 5.
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 Company has not yet determined the impact that adoption of this provision will have on its condensed consolidated financial statements.
Note 11. Subsequent Events
The Company has evaluated subsequent events through the time that the financial statements for the period ended September 30, 2009 were filed with the SEC in the Company’s Quarterly Report on Form 10-Q on November 9, 2009.
In October 2009, the Company repaid in full its $11.8 million fixed rate mortgage loan on the Boulevard Crossing property prior to its December 2009 maturity. The debt was repaid using the Company’s available cash, and the property was contributed to the unencumbered property pool for the unsecured credit facility.
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 September 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 September 30, 2009, we had an interest in seven properties in our development and redevelopment pipelines. Upon completion, we anticipate our current development and redevelopment properties to have approximately 1.1 million square feet 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 September 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.
Finally, as of September 30, 2009, we also owned interests in other land parcels comprising approximately 95 acres that we currently plan to use for future expansion of existing properties, development of new retail or commercial properties or for sale to third parties. These land parcels are classified as “Land held for development” in the accompanying condensed consolidated balance sheet.
In the third quarter of 2009, as part of our regular quarterly review, we determined that it was appropriate to write off the net book value on the Galleria Plaza operating property in Dallas Texas and recognize a non-cash impairment charge of $5.4 million. Our estimated future cash flows, which considers recent negative property-specific events, are anticipated to be insufficient to cover costs due to significant ground lease obligations and expected future required capital expenditures. The Company leases the ground on which the property is situated and currently intends to turn over the operations of and convey the title to the center to the ground lessor which will increase the Company’s annual cash flows by approximately $700,000. The non-cash impairment has no effect on the Company’s liquidity and there is no mortgage on the property.
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 continued softening of the economic environment. We expect these difficult conditions to continue to significantly restrict consumer spending through the remainder of 2009 and into 2010.
Factors contributing to consumers spending less at stores owned and/or operated by our retail tenants include, among others:
| · | Shortage of Financing. Lending institutions continue to have historically tight 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 and has made it more difficult for businesses to grow and expand. |
| · | 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 third quarter of 2009, approximately 15.1 million, or 9.8%, of Americans were unemployed. Rising unemployment rates could result in further contraction of 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 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. 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 have requested decreases or deferrals in their rent obligation during the first nine months of 2009. We have granted some of these requests 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 current and future 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 2009, several tenants vacated their stores, and in some cases, terminated their leases with us. It has become increasingly more difficult to negotiate lease termination fees from these terminating tenants. |
| · | Tenant Bankruptcies. The trend of bankruptcy filings by U.S. businesses has continued during 2009 and may continue into the foreseeable future. Bankruptcy declarations by our retail tenants has abated somewhat after increasing sharply in 2008 and in the first six months of 2009. |
| · | Decrease in Demand for Retail Space. Reflecting the extremely difficult current market conditions, demand for retail space at our shopping centers decreased in late 2008 while availability 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. While we have experienced increased leasing activity in recent months, overall tenancy at our shopping centers remains slightly lower than a year ago. As of September 30, 2009, our retail operating portfolio was approximately 91% leased and level with the leased percentage as of the end of the prior quarter. |
| · | Decrease in Third Party Construction Activity. As a reflection of the various economic and other factors previously discussed, we have experienced a significant decline in our third party construction activity during 2008 and the first nine months of 2009, which had a negative impact on the revenues of our development, construction and advisory services segment. We anticipate that general economic conditions will likely result in lower levels of third party construction activity for the remainder of 2009 and beyond. |
The factors discussed above, among others, continued to have a negative impact on our business in the third quarter of 2009. We expect that these conditions will continue into the foreseeable future.
Financing Strategy
As part of our overall financing and capital strategy to maintain a strong balance sheet with sufficient flexibility to fund our operating and development activities in a cost-effective way, we engaged in a number of financing activities in the third quarter of 2009. In August, the $8.2 million loan on our Bridgewater Crossing property was refinanced with a $7.0 million loan bearing interest at LIBOR plus 185 basis points and maturing in June 2013. We funded a $1.2 million paydown of this loan with cash. In September, the $15.8 million fixed rate mortgage loan on our Ridge Plaza property was retired prior to its October 2009 maturity using available cash.
In addition, subsequent to the end of the third quarter, in October we repaid in full our $11.8 million fixed rate mortgage loan on our Boulevard Crossing property prior to its December 2009 maturity, and, as a result, the only remaining 2009 debt maturities relate to scheduled monthly principal payments.
As of September 30, 2009, approximately $90.2 million of our consolidated indebtedness was scheduled to mature in 2010, including scheduled monthly principal payments. We continue to seek to refinance or extend the majority of these maturities on satisfactory terms. 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. While we can give no assurance, due to the current status of negotiations with existing and alternative lenders, we believe we will have the ability to extend, refinance, or repay all of our debt that is maturing through 2010. To the extent necessary, we may also utilize the availability on our unsecured revolving credit facility, pursuant to which we had approximately $69.5 million of availability as of September 30, 2009, or available cash. We continue to seek alternative sources of financing and other capital in the event we are not able to refinance our 2010 maturities on satisfactory terms, or at all.
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 September 30, 2009, our unfunded share of the total estimated cost of the properties in our current development and redevelopment pipelines was approximately $23 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 $32.6 million in available cash and cash equivalents, new and existing construction loans and draws on our unsecured credit facility, 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 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 September 30, 2009, we owned interests in 55 operating properties (consisting of 51 retail properties, three operating commercial properties and an associated parking garage) and seven entities that held interests in development or redevelopment properties.
At September 30, 2008, we owned interests in 57 operating properties (consisting of 52 retail properties, four operating commercial properties and an associated parking garage) and 10 entities that held interests in development or redevelopment properties.
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 September 30, 2009 to the Three Months Ended September 30, 2008” and “Comparison of Operating Results for the Nine Months Ended September 30, 2009 to the Nine Months Ended September 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 properties were in our development pipeline and were operational or partially operational at various times from January 1, 2008 through September 30, 2009:
| Property Name | | MSA | | Economic Occupancy Date1 | | Owned GLA | |
| Eddy Street Commons | | South Bend, IN | | September 2009 | | 165,000 | |
| 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 | |
| Gateway Shopping Center | | Marysville, WA | | April 2007 | | 100,949 | |
| ____________________ |
| 1 | Represents the date in which we started receiving rental payments under tenant leases at the property or the tenant took possession of the property, whichever occurred first. |
| | |
| 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. 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 an acquired property during 2008 in the comparison of operating results for the “Comparison of Operating Results for the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008” below.
Operating Property Disposition Activities
The following operating properties were sold from January 1, 2008 through September 30, 2009:
| Property Name | | MSA | | Disposition Date | | Owned GLA |
Spring Mill Medical, Phase I1 | | Indianapolis, Indiana | | December 2008 | | 63,431 |
| Silver Glen Crossing | | Chicago, Illinois | | December 2008 | | 132,716 |
| ____________________ |
| 1 | At the time of sale, Spring Mill Medical was an unconsolidated joint venture property in which we held a 50% interest. |
Redevelopment Activities
The following properties were in our redevelopment pipeline at various times during the period from January 1, 2008 through September 30, 2009:
| Property Name | | MSA | | Transition Date1 | | Owned GLA |
| Coral Springs Plaza | | Ft. Lauderdale, Florida | | March 2009 | | 94,756 |
Galleria Plaza2 | | 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 Center3 | | Indianapolis, Indiana | | March 2007 | | 685,000 |
Shops at Eagle Creek4 | | Naples, Florida | | December 2006 | | 75,944 |
| ____________________ |
| 1 | Transition date represents the date the property was transitioned from our operating portfolio to our redevelopment pipeline. |
| | |
| 2 | During the third quarter of 2009, we determined it was appropriate to write-off the net book value of the Galleria Plaza property and recognized a non-cash impairment charge of $5.4 million. |
| | |
| 3 | 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 part of 2008, it is classified as such in the comparison of operating results tables below. |
| | |
| 4 | Property was transitioned to 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 September 30, 2009 to the Three Months Ended September 30, 2008
The following table reflects our condensed consolidated statements of operations for the three months ended September 30, 2009 and 2008 (unaudited):
| | | Three months ended September 30, | | | | |
| | | 2009 | | | 2008 | | | Increase (Decrease) 2009 to 2008 | |
| Revenue: | | | | | | | | | |
| Rental income (including tenant reimbursements) | | $ | 22,066,538 | | | $ | 23,195,631 | | | $ | (1,129,093 | ) |
| Other property related revenue | | | 1,177,057 | | | | 3,797,675 | | | | (2,620,618 | ) |
| Construction and service fee revenue | | | 2,684,209 | | | | 7,355,282 | | | | (4,671,073 | ) |
| Total revenue | | | 25,927,804 | | | | 34,348,588 | | | | (8,420,784 | ) |
| Expenses: | | | | | | | | | | | | |
| Property operating expense | | | 4,427,364 | | | | 4,093,457 | | | | 333,907 | |
| Real estate taxes | | | 2,735,820 | | | | 3,502,958 | | | | (767,138 | ) |
| Cost of construction and services | | | 2,381,885 | | | | 6,139,130 | | | | (3,757,245 | ) |
| General, administrative, and other | | | 1,388,645 | | | | 1,452,845 | | | | (64,200 | ) |
| Depreciation and amortization | | | 7,865,268 | | | | 8,171,181 | | | | (305,913 | ) |
| Non-cash loss on impairment of real estate asset | | | 5,384,747 | | | | — | | | | 5,384,747 | |
| Total expenses | | | 24,183,729 | | | | 23,359,571 | | | | 824,158 | |
| Operating income | | | 1,744,075 | | | | 10,989,017 | | | | (9,244,942 | ) |
| Interest expense | | | (6,815,787 | ) | | | (7,512,825 | ) | | | (697,038 | ) |
Income tax benefit (expense) of taxable REIT subsidiary | | | 80,714 | | | | (131,691 | ) | | | (212,405 | ) |
| Income from unconsolidated entities | | | 73,524 | | | | 65,641 | | | | 7,883 | |
| Non-cash gain from consolidation of subsidiary | | | 1,634,876 | | | | — | | | | 1,634,876 | |
| Other income, net | | | 6,971 | | | | 45,619 | | | | (38,648 | ) |
| (Loss) income from continuing operations | | | (3,275,627 | ) | | | 3,455,761 | | | | (6,731,388 | ) |
| Income from discontinued operations | | | — | | | | 320,409 | | | | (320,409 | ) |
| Consolidated net (loss) income | | | (3,275,627 | ) | | | 3,776,170 | | | | (7,051,797 | ) |
| Net income attributable to noncontrolling interests | | | (107,743 | ) | | | (855,274 | ) | | | (747,531 | ) |
Net (loss) income attributable to Kite Realty Group Trust | | $ | (3,383,370 | ) | | $ | 2,920,896 | | | $ | (6,304,266 | ) |
Rental income (including tenant reimbursements) decreased approximately $1.1 million, or 5%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (1,868,536 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 860,765 | |
| Properties under redevelopment during 2008 and/or 2009 | | | (121,322 | ) |
| Total | | $ | (1,129,093 | ) |
Excluding the changes due to transitioned development properties and the properties under redevelopment, the net $1.9 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 $0.4 million from lower occupancy of small shop tenants at several other properties, a $0.4 million decrease due to the 2008 write-off to income of in-place lease liabilities at one of our properties, $0.2 million in rental income due to the second quarter 2009 sale of an outlot subject to a ground lease, and $0.4 million from lower recoveries due to real estate tax reductions at several of our operating properties.
Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on land parcel sales. This revenue decreased approximately $2.6 million, or 69%, as a result of a decrease of $2.5 million in gains on land parcel sales and a $0.1 million decrease in lease termination income.
Construction revenue and service fees decreased approximately $4.7 million, or 64%, primarily as a result of a decline in third party construction contracts and construction management fees due to the economic downturn and our decision to reduce our third party construction activity.
Property operating expenses increased approximately $0.3 million, or 8%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | 265,573 | |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 215,495 | |
| Properties under redevelopment during 2008 and/or 2009 | | | (147,161 | ) |
| Total | | $ | 333,907 | |
Excluding the changes due to transitioned development properties and the properties under redevelopment, the net $0.3 million increase in property operating expenses was primarily due to a $0.3 million increase in bad debt expense at a number of our operating properties.
Real estate taxes decreased approximately $0.8 million, or 22%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (953,523 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 73,306 | |
| Properties under redevelopment during 2008 and/or 2009 | | | 113,079 | |
| Total | | $ | (767,138 | ) |
Excluding the changes due to transitioned development properties and the properties under redevelopment, the net $1.0 million decrease in real estate taxes was primarily due to the effects of 2009 reassessments, especially in the state of Indiana, partially offset by the effects of appeals and reassessments recorded in 2008.
Cost of construction and services decreased approximately $3.8 million, or 61%, primarily as a result of a decline in third party construction contracts and construction management fees due to the economic downturn and our decision to reduce our third party construction activity.
Depreciation and amortization expense decreased approximately $0.3 million, or 4%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (393,117 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 118,775 | |
| Properties under redevelopment during 2008 and/or 2009 | | | (31,571 | ) |
| Total | | $ | (305,913 | ) |
Excluding the changes due to transitioned development properties and the properties under redevelopment, the net $0.4 million decrease in depreciation and amortization expense was primarily due to a higher level of accelerated depreciation and amortization of vacated tenant costs at several of our operating properties in 2008 as compared to 2009.
The $5.4 million non-cash loss on impairment of a real estate asset in 2009 relates to the write-off of the net book value of our Galleria Plaza property. Our estimated future cash flows, which consider recent negative property-specific events, are anticipated to be insufficient to cover costs due to significant ground lease obligations and expected future required capital expenditures.
Interest expense decreased $0.7 million, or 9%, primarily due to a 270 basis point reduction in the average LIBOR interest rate.
Income tax benefit (expense) decreased $0.2 million primarily due to lower construction volume in our taxable REIT subsidiary.
The $1.6 million non-cash gain from consolidation of subsidiary in 2009 was recognized upon the consolidation of The Centre joint venture. In the third quarter of 2009, we paid off the third party loan on this previously unconsolidated entity and contributed approximately $2.1 million of capital to the entity. In accordance with the provisions of Topic 810 – “Consolidation” of the ASC, the financial statements of The Centre were consolidated as of September 30, 2009 and its assets and liabilities were recorded at fair value with a resulting non-cash gain of $1.6 million.
Comparison of Operating Results for the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008
The following table reflects our condensed consolidated statements of operations for the nine months ended September 30, 2009 and 2008 (unaudited):
| | | Nine months ended September 30, | | | | |
| | | 2009 | | | 2008 | | | Increase (Decrease) 2009 to 2008 | |
| Revenue: | | | | | | | | | |
| Rental income (including tenant reimbursements) | | $ | 67,364,625 | | | $ | 68,972,815 | | | $ | (1,608,190 | ) |
| Other property related revenue | | | 4,535,235 | | | | 11,929,267 | | | | (7,394,032 | ) |
| Construction and service fee revenue | | | 14,595,667 | | | | 19,955,122 | | | | (5,359,455 | ) |
| Total revenue | | | 86,495,527 | | | | 100,857,204 | | | | (14,361,677 | ) |
| Expenses: | | | | | | | | | | | | |
| Property operating expense | | | 14,116,458 | | | | 12,379,283 | | | | 1,737,175 | |
| Real estate taxes | | | 9,132,701 | | | | 9,804,123 | | | | (671,422 | ) |
| Cost of construction and services | | | 12,958,935 | | | | 16,927,764 | | | | (3,968,829 | ) |
| General, administrative, and other | | | 4,279,472 | | | | 4,422,203 | | | | (142,731 | ) |
| Depreciation and amortization | | | 24,105,495 | | | | 24,547,847 | | | | (442,352 | ) |
| Non-cash loss on impairment of real estate asset | | | 5,384,747 | | | | — | | | | 5,384,747 | |
| Total expenses | | | 69,977,808 | | | | 68,081,220 | | | | 1,896,588 | |
| Operating income | | | 16,517,719 | | | | 32,775,984 | | | | (16,258,265 | ) |
| Interest expense | | | (20,583,919 | ) | | | (22,117,890 | ) | | | (1,533,971 | ) |
Income tax benefit (expense) of taxable REIT subsidiary | | | 29,529 | | | | (1,536,777 | ) | | | (1,566,306 | ) |
| Income from unconsolidated entities | | | 226,041 | | | | 212,936 | | | | 13,105 | |
| Non-cash gain from consolidation of subsidiary | | | 1,634,876 | | | | — | | | | 1,634,876 | |
| Other income, net | | | 91,492 | | | | 142,527 | | | | (51,035 | ) |
| (Loss) income from continuing operations | | | (2,084,262 | ) | | | 9,476,780 | | | | (11,561,042 | ) |
| Income from discontinued operations | | | — | | | | 956,273 | | | | (956,273 | ) |
| Consolidated net (loss) income | | | (2,084,262 | ) | | | 10,433,053 | | | | (12,517,315 | ) |
| Net income attributable to noncontrolling interests | | | (340,781 | ) | | | (2,345,569 | ) | | | (2,004,788 | ) |
Net (loss) income attributable to Kite Realty Group Trust | | $ | (2,425,043 | ) | | $ | 8,087,484 | | | $ | (10,512,527 | ) |
Rental income (including tenant reimbursements) decreased approximately $1.6 million, or 2%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (2,726,413 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 2,293,292 | |
| Property acquired during 2008 | | | 34,233 | |
| Properties under redevelopment during 2008 and/or 2009 | | | (1,209,302 | ) |
| Total | | $ | (1,608,190 | ) |
Excluding the changes due to transitioned development properties, the acquisition of a property, and the properties under redevelopment, the net $2.7 million decrease in rental income was primarily due a $1.1 million decrease due to termination of big box tenants at three of our properties, $0.5 million from lower occupancy of small shop tenants at several other properties, a $0.4 million decrease due to the 2008 write off of in-place lease liabilities to income at one of our properties, $0.2 million from the second quarter 2009 sale of an outlot subject to a ground lease, and $0.5 million from lower recoveries due to real estate tax reductions at several of our operating properties.
Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on land parcel sales. This revenue decreased approximately $7.4 million, or 62%, primarily as a result of a decrease of $6.8 million in gains on land parcel sales and a $0.8 million decrease in lease termination income.
Construction revenue and service fees decreased approximately $5.4 million, or 27%, primarily as a result of a decline in third party construction contracts and construction management fees due to the economic downturn and our decision to reduce our third party construction activity.
Property operating expenses increased approximately $1.7 million, or 14%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | 1,278,506 | |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 384,057 | |
| Property acquired during 2008 | | | 80,271 | |
| Properties under redevelopment during 2008 and/or 2009 | | | (5,659 | ) |
| Total | | $ | 1,737,175 | |
Excluding the changes due to transitioned development properties, the acquisition of a property, and the properties under redevelopment, the net $1.3 million increase in property operating expenses was primarily due to a $1.2 million net increase in bad debt expense at a number of our operating properties.
Real estate taxes decreased approximately $0.7 million, or 7%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (897,864 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 197,203 | |
| Property acquired during 2008 | | | (14,435 | ) |
| Properties under redevelopment during 2008 and/or 2009 | | | 43,674 | |
| Total | | $ | (671,422 | ) |
Excluding the changes due to transitioned development properties, the acquisition of a property, and the properties under redevelopment, the net $0.9 million decrease in real estate taxes was primarily attributable to the timing of reassessments and the settlement of appeals in 2009 and 2008. Specifically, in the third quarter of 2009, we experienced a decrease in real estate taxes from a reduction in rate at two of our commercial properties, a small portion of which is refundable to tenants.
Cost of construction and services decreased approximately $4.0 million, or 23%, primarily as a result of a decline in third party construction contracts and construction management fees due to the economic downturn and our decision to reduce our third party construction activity.
General, administrative and other expenses decreased approximately $0.1 million, or 3%. This decrease is primarily due to lower personnel costs.
Depreciation and amortization expense decreased approximately $0.4 million, or 2%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (261,712 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 758,805 | |
| Property acquired during 2008 | | | (72,135 | ) |
| Properties under redevelopment during 2008 and/or 2009 | | | (867,310 | ) |
| Total | | $ | (442,352 | ) |
Excluding the changes due to transitioned development properties, the acquisition of a property, and the properties under redevelopment, the net $0.3 million decrease in depreciation and amortization expense was primarily due to a higher level of accelerated depreciation and amortization of vacated tenant costs at several of our operating properties in 2008 as compared to 2009.
The $5.4 million non-cash loss on impairment of a real estate asset in 2009 relates to the write-off of the net book value of our Galleria Plaza property. Our estimated future cash flows, which consider recent negative property-specific events, are anticipated to be insufficient to cover costs due to significant ground lease obligations and expected future required capital expenditures.
Interest expense decreased approximately $1.5 million, or 7%, due to the following:
| | | Increase (Decrease) 2009 to 2008 | |
| Properties fully operational during 2008 and 2009 & other | | $ | (2,012,208 | ) |
Development properties that became operational or were partially operational in 2008 and/or 2009 | | | 707,887 | |
| Property acquired during 2008 | | | (229,650 | ) |
| Total | | $ | (1,533,971 | ) |
Excluding the changes due to transitioned development properties and the acquisition of a property, the net $2.0 million decrease in interest expense was primarily due to the retirement of variable rate debt at several of our properties, the pay down of our unsecured revolving credit facility with proceeds from our common share offering, and a lower average LIBOR.
Income tax benefit (expense) decreased $1.6 million primarily due to income taxes incurred by our taxable REIT subsidiary associated with the gain on the sale of land in 2008.
The $1.6 million non-cash gain on consolidation of subsidiary in 2009 was recognized upon the consolidation of The Centre joint venture. In the third quarter of 2009, we paid off the third party loan on this previously unconsolidated entity and contributed approximately $2.1 million of capital to the entity. In accordance with the provisions of Topic 810 – “Consolidation” of the ASC, the financial statements of The Centre were consolidated as of September 30, 2009 and its assets and liabilities were recorded at fair value with a resulting non-cash gain of $1.6 million.
Liquidity and Capital Resources
Current State of Capital Markets and Our Financing Strategy
Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and development activities in a cost-effective way. We consider a number of factors when evaluating our level of indebtedness and when making decisions regarding additional borrowings, including the purchase price of properties to be developed or acquired with debt financing, the estimated market value of our properties and our Company as a whole upon consummation of the refinancing and the ability of particular properties to generate cash flow to cover expected debt service. As discussed in more detail above in “Overview”, the challenging market conditions that currently exist have created a need for most REITs, including us, to place a significant amount of emphasis on financing and capital strategies.
We engaged in a number of financing activities in the third quarter of 2009. In August, the $8.2 million loan on our Bridgewater Crossing property was refinanced with a $7.0 million loan bearing interest at LIBOR plus 185 basis points and maturing in June 2013. We funded a $1.2 million paydown of this loan with cash. In September, the $15.8 million fixed rate mortgage loan on our Ridge Plaza property was retired using available cash prior to its October 2009 maturity. As of September 30, 2009, approximately $69.5 million was available to be drawn under our unsecured revolving credit facility and $32.6 million was in available cash and cash equivalents.
In addition, subsequent to the end of the third quarter, in October we repaid in full our $11.8 million fixed rate mortgage loan on our Boulevard Crossing property prior to its December 2009 maturity. The debt was repaid using our available cash, and the property was contributed to the unencumbered property pool for the unsecured facility. As a result of this payoff, the only remaining 2009 debt maturities relate to scheduled monthly principal payments.
We continue to conduct negotiations with our existing and alternative lenders to refinance or obtain extensions on our 2010 maturities, which totaled approximately $90.2 million as of September 30, 2009, including scheduled monthly principal payments. While we can give no assurance, due to the current status of negotiations 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 the end of 2010.
In the future, we may raise additional capital by disposing of properties and land parcels that are no longer a core component of our growth strategy and/or pursuing joint venture capital partners. We will also continue to monitor the capital markets and may consider raising additional capital through the issuance of our common shares, preferred shares or other securities.
As of September 30, 2009, we had available cash and cash equivalents on hand of $32.6 million. We may be subject to concentrations of credit risk with regards to our cash and cash equivalents. We place our cash and temporary cash investments with high-credit-quality financial institutions. From time to time, such investments may temporarily be in excess of FDIC and SIPC insurance limits; however, we attempt to limit our exposure at any one time. As of September 30, 2009, the majority of our cash and cash equivalents were held in demand deposit accounts that are 100% insured under the federal government’s Temporary Liquidity Guarantee Program.
In addition to cash generated from operations, we discuss below our other principal capital resources.
Our Principal Capital Resources
Our Unsecured Revolving Credit Facility
In February 2007, our Operating Partnership entered into an amended and restated four-year $200 million unsecured revolving credit facility with a group of lenders and Key Bank National Association, as agent (the “unsecured facility”). As of September 30, 2009, our outstanding indebtedness under the unsecured facility was approximately $77.8 million, bearing interest at a current rate of LIBOR plus 125 basis points. Including the effects of our hedge agreements, at September 30, 2009, the weighted average interest rate on our unsecured revolving credit facility was approximately 6.27%.
The amount that we may borrow under the unsecured facility is based on the value of assets in the unencumbered property pool. As of September 30, 2009, we have 52 unencumbered properties and other assets used to calculate the value of the unencumbered property pool, of which 49 are wholly owned and three of which are owned through joint ventures. The major unencumbered assets include: Broadstone Station, Courthouse Shadows, Four Corner Square, Hamilton Crossing, King's Lake Square, Market Street Village, Naperville Marketplace, PEN Products, Publix at Acworth, Red Bank Commons, Ridge Plaza, Shops at Eagle Creek, Traders Point II, Union Station Parking Garage, Wal-Mart Plaza, and Waterford Lakes. As of September 30, 2009 the amount available to us for future draws under this facility was approximately $69.5 million.
We and several of the Operating Partnership’s subsidiaries are guarantors of the Operating Partnership’s obligations under the unsecured facility. The unsecured facility has a maturity date of February 20, 2011, with an option for a one-year extension (subject to certain customary conditions). Borrowings under the unsecured facility bear interest at a variable interest rate of LIBOR plus 115 to 135 basis points, depending on our leverage ratio. The unsecured facility has a commitment fee ranging from 0.125% to 0.20% that is applicable to the average daily unused amount. Subject to certain conditions, including the prior consent of the lenders, we have the option to increase our borrowings under the unsecured facility to a maximum of $400 million if there are sufficient unencumbered assets to support the additional borrowings. As discussed in more detail below under “Debt Maturities”, we may seek to increase the unencumbered asset pool related to the facility in order to increase our borrowing capacity. The unsecured facility also includes a short-term borrowing line of $25 million with a variable interest rate. Borrowings under the short-term line may not be outstanding for more than five days.
Our ability to borrow under the unsecured facility is subject to ongoing compliance with various restrictive covenants, including with respect to liens, indebtedness, investments, dividends, mergers and asset sales. In addition, the unsecured facility requires us to satisfy certain financial covenants, including:
| · | a maximum leverage ratio of 65% (or up to 70% in certain circumstances); |
| · | Adjusted EBITDA (as defined in the unsecured facility) to fixed charges coverage ratio of at least 1.50 to 1; |
| · | minimum tangible net worth (defined as Total Asset Value less Total Indebtedness) of $300 million (plus 75% of the net proceeds of any equity issuances from the date of the agreement); |
| · | ratio of net operating income of unencumbered property to debt service under the unsecured facility of at least 1.50 to 1; |
| · | minimum unencumbered property pool occupancy rate of 80%; |
| · | ratio of variable rate indebtedness to total asset value of no more than 0.35 to 1; and |
| · | ratio of recourse indebtedness to total asset value of no more than 0.30 to 1. |
We were in compliance with all applicable covenants under the unsecured facility as of September 30, 2009.
Under the terms of the unsecured facility, we are permitted to make distributions to our shareholders of up to 95% of our funds from operations provided that no event of default exists. If an event of default exists, we may only make distributions sufficient to maintain our REIT status. However, we may not make any distributions if an event of default resulting from nonpayment or bankruptcy exists, or if our obligations under the credit facility are accelerated.
Capital Markets
We have filed a registration statement with the Securities and Exchange Commission allowing us to offer, from time to time, common shares or preferred shares for an aggregate initial public offering price of up to $500 million, of which $408 million remains available as of September 30, 2009. In May 2009, we completed an equity offering of 28,750,000 common shares at an offering price of $3.20 per share for aggregate gross and net proceeds of $92.0 million and $87.5 million, respectively. Approximately $57 million of the net proceeds were used to repay borrowings under our unsecured revolving credit facility and the remainder was retained as cash, which we anticipate using to address future debt maturities and capital needs.
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, although we cannot guarantee that we will be able to access the capital markets on favorable terms, if at all.
Short and Long-Term Liquidity Needs
We derive the majority of our revenue from tenants who lease space from us at our properties. Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants. While we believe that the nature of the properties in which we typically invest—primarily neighborhood and community shopping centers—provides a relatively stable revenue flow in uncertain economic times, the current general economic downturn is adversely affecting the ability of some of our tenants to meet their lease obligations, as discussed in more detail above in “Overview”. In turn, these conditions are having a negative impact on our business. If the downturn is prolonged, our cash flow from operations could be materially adversely affected.
Short-Term Liquidity Needs
To avoid paying tax on our income and to meet the requirements for qualifying for REIT status (which include the stipulation that we distribute to shareholders at least 90% of our annual REIT taxable income), we distribute a substantial majority of our taxable income on an annual basis. This fact, coupled with the nature of our business, causes us to have substantial liquidity needs over both the short-term and the long-term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our operating properties, interest expense and scheduled principal payments on our debt, expected dividend payments (including distributions to persons who hold units in our Operating Partnership) and recurring capital expenditures. Each quarter we discuss with our Board of Trustees (the “Board”) our liquidity requirements along with other relevant factors before the Board decides whether and in what amount to declare a distribution. In September 2009, our Board declared a quarterly cash distribution of $0.06 per common share for the quarter ending September 30, 2009. Our distributions for the last two quarters were lower than the distributions paid in the prior year, thereby allowing us to conserve additional liquidity. The Board of Trustees is continuing to evaluate current economic and market conditions and anticipates declaring a quarterly cash distribution for the quarter ending December 31, 2009 later in the fourth quarter.
When we lease space to new tenants, or renew leases for existing tenants, we also incur expenditures for tenant improvements and external leasing commissions. These amounts, as well as the level of recurring capital improvement expenditures, will vary from year to year. During the three months ended September 30, 2009, we incurred approximately $0.4 million of costs for recurring capital expenditures on operating properties and approximately $0.5 million of costs for tenant improvements and external leasing commissions. We currently anticipate incurring approximately $4-5 million in additional tenant improvements, renovation and expansion costs within the next twelve months for two recently executed anchor tenant leases. We are also in lease negotiations with big box and shop tenants that could require the expenditure of tenant improvement, renovation and expansion dollars. We anticipate these expenditures will be funded through draws on the unsecured credit facility.
We expect to meet our short-term liquidity needs through cash and cash equivalents, borrowings under the unsecured facility, new construction or mortgage loans, cash generated from operations and, to the extent necessary, accessing the public equity and debt markets to the extent that we are able.
Debt Maturities
The following table presents scheduled principal repayments on mortgage and other indebtedness as of September 30, 2009:
20091 | | $ | 12,511,073 |
| 2010 | | | 90,216,302 |
20112 | | | 251,294,810 |
| 2012 | | | 54,196,172 |
| 2013 | | | 14,584,352 |
| Thereafter | | | 236,284,373 |
| | | | |
| Unamortized Premiums | | | 1,085,483 |
| Total | | $ | 660,172,565 |
| ____________________ |
| 1 | In October, we repaid in full our $11.8 million fixed rate mortgage loan on the Boulevard Crossing property prior to its December 2009 maturity, and, as a result, the only remaining 2009 debt maturities relate to scheduled monthly principal payments. |
| | |
| 2 | Our unsecured revolving credit facility, of which $77.8 million was outstanding as of September 30, 2009, has an extension option to 2012 subject to certain customary provisions. |
As of September 30, 2009, approximately $90.2 million of our consolidated indebtedness was scheduled to mature in 2010, including scheduled monthly principal payments. We are in the process of negotiating extensions with the current lender on these loans with the exception of the loan on our Tarpon Springs Plaza property, which we currently anticipate retiring with proceeds from a permanent loan on the Ridge Plaza operating property.
Long-Term Liquidity Needs
Our long-term liquidity needs consist primarily of funds necessary to pay for maturing indebtedness, the development of new properties, redevelopment of existing properties, non-recurring capital expenditures, and potential acquisitions of properties.
Maturing Indebtedness. We anticipate addressing our maturing construction and mortgage loans, as well as our term loan and unsecured revolving credit facility, through extensions or refinancings with the current lenders, seeking financing from replacement lenders, or utilizing our available cash and capacity on our unsecured facility.
Redevelopment Properties. As of September 30, 2009, five of our properties (Bolton Plaza, Rivers Edge, Courthouse Shadows, Four Corner Square, and Coral Springs Plaza) were undergoing redevelopment activities. We anticipate our investment in these redevelopment projects will be a total of approximately $11.5 million, which we currently intend to fund through borrowings on our unsecured facility. We are currently in negotiations with potential anchor tenants for three of the five projects. Each of these tenants will enhance the projects and provide additional clarity on the scope and cost of each redevelopment.
Development Properties. As of September 30, 2009, we had two development projects in our current development pipeline. The total estimated cost, including our share and our joint venture partners’ share, for these projects is approximately $82 million, of which approximately $68 million had been incurred as of September 30, 2009. Our share of the total estimated cost of these projects is approximately $59 million, of which we have incurred approximately $46 million as of September 30, 2009. We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through existing construction loans. In addition, if necessary, we may make draws on our unsecured facility to the extent the facility is available.
“Shadow” Development Pipeline. In addition to our current development pipeline, we have a “shadow” development pipeline which includes land parcels that are in various stages of preparation for construction to commence, including pre-leasing activity and negotiations for third party financing. As of September 30, 2009, this shadow pipeline consisted of six projects that are expected to contain approximately 2.8 million square feet of total leasable area. We currently anticipate the total estimated cost of these six projects will be approximately $304 million, of which our share is currently expected to be approximately $140 million. However, we are generally not contractually obligated to complete any developments in our shadow pipeline, as these projects consist of land parcels on which we have not yet commenced construction. With respect to each asset in the shadow pipeline, our policy is to not commence vertical construction until pre-established leasing thresholds are achieved and the requisite third-party financing is in place. Once these projects are transferred to the current development pipeline, we intend to fund our investment in these developments primarily through new construction loans and joint ventures, as well as borrowings on our unsecured facility, if necessary.
Selective Acquisitions, Developments and Joint Ventures. We may selectively pursue the acquisition and development of other properties, which would require additional capital. It is unlikely we would have sufficient funds on hand to meet these long-term capital requirements. We would have to satisfy these needs through participation in joint venture arrangements, additional borrowings, sales of common or preferred shares and/or cash generated through property or other asset dispositions. We cannot be certain that we would have access to these sources of capital on satisfactory terms, if at all, to fund our long-term liquidity requirements. Our ability to access the capital markets will be dependent on a number of factors, including general capital market conditions, which are discussed in more detail above in “Overview”.
We have entered into an agreement (the “Venture”) with Prudential Real Estate Investors (“PREI”) to pursue joint venture opportunities for the development and selected acquisition of community shopping centers in the United States. The agreement allows for the Venture to develop or acquire up to $1.25 billion of well-positioned community shopping centers in strategic markets in the United States. Under the terms of the agreement, we have agreed to present to PREI opportunities to develop or acquire community shopping centers, each with estimated project costs in excess of $50 million. We have the option to present to PREI additional opportunities with estimated project costs under $50 million. The agreement allows for equity capital contributions of up to $500 million to be made to the Venture for qualifying projects. We expect contributions would be made on a project-by-project basis with PREI contributing 80% and us contributing 20% of the equity required. Our first project with PREI is Parkside Town Commons, which is currently in our shadow development pipeline.
Cash Flows
Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008
Cash provided by operating activities was $14.5 million for the nine months ended September 30, 2009, a decrease of $16.6 million from the first nine months of 2008. The decrease in cash provided by operations was largely the result of the change in accounts payable, accrued expenses, deferred revenue and other liabilities between periods of approximately $8.1 million and the change in other property-related revenue, primarily consisting of land sales, of approximately $7.4 million.
Cash used in investing activities was $42.3 million for the nine months ended September 30, 2009, a decrease of $55.5 million compared to the first nine months of 2008. The decrease in cash used in investing activities was primarily a result of a decrease of $70.8 million in property acquisitions and capital expenditures in the first nine months of 2009 compared to the first nine months of 2008, which was partially offset by an increase of $10.8 million in contributions to unconsolidated entities and a change in construction payables of approximately $2.1 million.
Cash provided by financing activities was $50.4 million for the nine months ended September 30, 2009, a decrease of $8.8 million compared to the first nine months of 2008. The decrease in cash provided by financing activities is largely due to a decrease of $101.0 million in loan proceeds in the first nine months of 2009 compared to the first nine months of 2008, partially offset by the $87.5 million net proceeds from the common share offering in May 2009.
Funds From Operations
Funds From Operations (“FFO”), is a widely used performance measure for real estate companies and is provided here as a supplemental measure of operating performance. We calculate FFO in accordance with the best practices described in the April 2002 National Policy Bulletin of the National Association of Real Estate Investment Trusts (NAREIT), which we refer to as the White Paper. The White Paper defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
Given the nature of our business as a real estate owner and operator, we believe that FFO is helpful to investors as a starting point in measuring our operational performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as gains (or losses) from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance, is not an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, and is not indicative of funds available to satisfy our cash needs, including our ability to make distributions. Our computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definitions differently than we do.
The following table reconciles our consolidated net income to FFO for the three and nine months ended September 30, 2009 and 2008 (unaudited):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Consolidated net (loss) income1 | | $ | (3,275,627 | ) | | $ | 3,776,170 | | | $ | (2,084,262 | ) | | $ | 10,433,053 | |
Less non-cash gain from consolidation of subsidiary, net of noncontrolling interests | | | (980,926 | ) | | | — | | | | (980,926 | ) | | | — | |
Deduct net income attributable to noncontrolling interests in properties | | | (695,655 | ) | | | (22,230 | ) | | | (742,130 | ) | | | (37,830 | ) |
Add depreciation and amortization of consolidated entities, net of noncontrolling interests in properties | | | 7,724,160 | | | | 8,105,171 | | | | 23,693,084 | | | | 24,406,665 | |
| Add depreciation and amortization of unconsolidated entities | | | 52,797 | | | | 101,944 | | | | 157,623 | | | | 304,572 | |
Funds From Operations of the Kite Portfolio2 | | | 2,824,749 | | | | 11,961,055 | | | | 20,043,389 | | | | 35,106,460 | |
Deduct redeemable noncontrolling interests in Funds From Operations | | | (319,197 | ) | | | (2,655,448 | ) | | | (3,173,320 | ) | | | (7,793,634 | ) |
Funds From Operations allocable to the Company2 | | $ | 2,505,552 | | | $ | 9,305,607 | | | $ | 16,870,069 | | | $ | 27,312,826 | |
| ____________________ |
| 1 | Includes non-cash impairment loss on a real estate asset of $5,384,747 for the three and nine months ended September 30, 2009. |
| | |
| 2 | “Funds From Operations of the Kite Portfolio” measures 100% of the operating performance of the Operating Partnership’s real estate properties and construction and service subsidiaries in which we own an interest. “Funds From Operations allocable to the Company” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership. |
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do, however, have certain obligations to some of the projects in our current development pipeline, including our obligations in connection with our Eddy Street Commons development, as discussed below in “Contractual Obligations”, as well as our joint venture with PREI with respect to our Parkside Town Commons development, as discussed above. As of September 30, 2009, we owned a 40% interest in this joint venture which, under the terms of this joint venture, will be reduced to 20% upon project specific construction financing.
As of September 30, 2009, the seven joint ventures in which the Company had an investment had total debt of approximately $102.6 million. Of this amount, $13.5 million was unconsolidated and related to the Parkside Town Commons development. Unconsolidated joint venture debt is the liability of the joint venture and is typically secured by the assets of the joint venture. As of September 30, 2009, the Operating Partnership had guaranteed its share of the unconsolidated joint venture debt of $13.5 million 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 that property could be sold in order to satisfy the outstanding obligation.
During the third quarter of 2009, a construction loan with a total commitment of $10.9 million was obtained for the limited service hotel unconsolidated joint venture at the Eddy Street Commons development in which we have a 50% interest. The variable rate loan bears interest at the greater of LIBOR + 315 basis points or 4.00% and matures in August 2014. As of September 30, 2009, no draws had been made on this loan.
Contractual Obligations
Obligations in Connection with Our Current Development, Redevelopment and Shadow Pipeline
We are obligated under various contractual arrangements to complete the projects in our current development pipeline. We currently anticipate our share of the cost of the two projects in our current development pipeline will be approximately $59 million (including $35 million of costs associated with Phase I of our Eddy Street Commons development discussed below), of which approximately $13 million of our share was unfunded as of September 30, 2009. We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through existing construction loans. In addition, if necessary, we may make draws on our unsecured credit facility to the extent the facility is available.
In addition to our current development pipeline, we also have a redevelopment pipeline and 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 financing. Generally, we are not contractually obligated to complete any projects in our redevelopment or shadow pipelines. With respect to each asset in the shadow pipeline, our policy is to not commence vertical construction until appropriate pre-leasing thresholds are met and the requisite third-party financing is in place.
Eddy Street Commons at the University of Notre Dame
Phase I of Eddy Street Commons at the University of Notre Dame, located adjacent to the University in South Bend, Indiana is one of our current development pipeline projects. This multi-phase project is expected to include retail, office, hotels, a parking garage, apartments and residential units. We will own the retail and office components while other components are expected to be owned by third parties or through joint ventures. 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 are being used for the construction of a parking garage and infrastructure improvements to this project. The first retail tenants at this development property opened for business in September 2009.
We have jointly guaranteed the apartment developer’s construction loan, which at September 30, 2009, has an outstanding balance of approximately $21.1 million. We also have a contractual obligation in the form of a completion guarantee to the University of Notre Dame and to the City of South Bend to complete all phases of the $200 million project (our portion of which is approximately $64 million), with the exception of certain of the residential units. If we are required to complete a portion of the residential components of the project or perform under our guaranty obligations, we have the right to pursue control of the related assets. If we fail to fulfill our contractual obligations in connection with the project, but are using our best efforts to do so, we may be held liable to the University of Notre Dame and the City of South Bend but we have limited our liability to both of these entities.
Market Risk Related to Fixed and Variable Rate Debt
Market risk refers to the risk of loss from adverse changes in interest rates of debt instruments of similar maturities and terms. We had approximately $660.2 million of outstanding consolidated indebtedness as of September 30, 2009 (inclusive of net premiums on acquired debt of $1.1 million). As of September 30, 2009, we were party to various consolidated interest rate hedge agreements for a total of $205 million, with interest rates ranging from 4.40% to 6.32% and maturities over various terms through 2012. Including the effects of these swaps, our fixed and variable rate debt would have been approximately $518.3 million (79%) and $140.8 million (21%), respectively, of our total consolidated indebtedness at September 30, 2009. Including our share of unconsolidated debt and the effect of these swaps, our fixed and variable rate debt was 77% and 23%, respectively, of total consolidated and our share of unconsolidated indebtedness at September 30, 2009.
The fair value of our fixed rate debt as of September 30, 2009 was $323.2 million. Based on the amount of fixed rate debt outstanding at September 30, 2009, a 100 basis point increase in market interest rates would result in a decrease in its fair value of approximately $13.2 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed rate debt of approximately $14.1 million. A 100 basis point increase in interest rates on our variable rate debt as of September 30, 2009 would decrease our annual cash flow by approximately $1.4 million. A 100 basis point decrease in interest rates on our variable rate debt as of September 30, 2009 would increase our annual cash flow by approximately $1.4 million.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
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 consolidated financial condition, results of operations or cash flows taken as a whole.
Not Applicable
Not Applicable
| Defaults Upon Senior Securities |
Not Applicable
Not Applicable
Not Applicable
| Exhibit No. | | Description | | Location |
| 31.1 | | Certification of principal executive officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | | |
| 31.2 | | Certification of principal financial officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | | |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | KITE REALTY GROUP TRUST |
| | | |
| November 9, 2009 | By: | /s/ John A. Kite |
| (Date) | | John A. Kite |
| | | Chairman and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | | |
| November 9, 2009 | By: | /s/ Daniel R. Sink |
| (Date) | | Daniel R. Sink |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and |
| | | Principal Accounting Officer) |
EXHIBIT INDEX
| Exhibit No. | | Description | | Location |
| 31.1 | | Certification of principal executive officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | | |
| 31.2 | | Certification of principal financial officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | | |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
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