Environment and Real Estate & Retail

Kite Realty goes on defensive: Local developer says stock sale should help it through tough times

October 27, 2008

Expecting a rocky 2009, locally based Kite Realty Group Trust sold nearly 5 million new shares in October to quickly raise almost $48 million in cash.

The retail real estate investment trust saw its stock price tumble after the $10.55-per-share offering, from a close of $11.19 the day (Oct. 2) it announced the sale to $7.44 by Oct. 10.

The deal dilutes existing shareholders, but company officials say it puts Kite in a stronger cash position to pay down debt and ride out an ugly market for real estate developers. The company had hoped to sell 3 million shares, but sold more thanks to strong interest from institutional investors.

"We wanted to have cushion in our capital base going into this difficult economic time," Kite CEO John A. Kite said in an interview. "It was an opportunistic situation. We felt very strongly that we were running up a period of time where it would be very difficult for real estate companies to raise capital."

The proceeds will be used in part to pay down a $200 million credit line with Key Bank the company expects to use toward its development and redevelopment pipeline. The credit line has a limit based on the value of the company's 46 unencumbered properties, including Glendale Town Center.

In the last few months, the company also tied down a $50 million, three-year term loan-for a total of $100 million in fresh capital.

"We want to make sure we're operating from a position of strength," said Tom McGowan, Kite's chief operating officer. "A lot of companies on the market need to sell assets. We've been able to secure this capital; this puts us in a position to stay out in front of potential problems."

Most retail real estate owners are suffering thanks in large part to concerns over the viability of their tenants. As consumers cut back on spending, retailers are slowing down on expansion and closing underperforming stores. Some stores, including Linens 'n Things, have filed for bankruptcy and plan to liquidate.

"The worst fears of the real estate industry seem to have come true with the slow spread of housing slowdown to other sectors," Ford Equity Research said in a research note on Kite. "The impact of the subprime meltdown is being felt across the commercial real estate industry as retail property prices have fallen and vacancy rates across the country have risen."

One risky-looking tenant for Kite is Circuit City, a company many see as on the brink of bankruptcy. Circuit City is the developer's second-largest tenant across its 50 retail properties.

In a regulatory filing, Kite said it had four of the electronics stores, representing about 2.6 percent of the annual base rent generated by the company's portfolio. Kite now has three of the electronics stores.

"Tenants come and tenants go," Kite said, "but good real estate wins. We'll ultimately fill spaces."

The company also has steep exposure to the volatile Florida market, where it owns 13 properties that generate about 24 percent of Kite's lease income. The company gets three-fourths of its revenue from Florida, Indiana and Texas-markets with low barriers to entry for competitors.

Still, analysts believe Kite is positioned well, particularly after selling new shares for the second time since the company went public in August 2004. Kite has 137 employees, including 100 at its headquarters at 30 S. Meridian St.

"We think this move will enhance liquidity and flexibility, especially in this credit-constrained environment," an analyst for Standard & Poor's wrote in a research note.

Channel Trend maintains a "buy" rating on shares of Kite, while Ford Equity recommends holding the shares.

"For retail REITs like Kite Realty, a delay or cancellation of fresh leases would hurt, especially with its key tenants," the Ford report says. "However, the long-term nature of retail leases and high occupancy levels are expected to provide some cushioning in the event of a downturn."

Kite has an occupancy level across its portfolio of 95 percent.

"Short term, it's just replacing debt for equity," Kite said of the sale of new shares. "Long term, we will be deploying capital into opportunities."

Kite has interests in 57 operating properties, 52 of them retail. It also owns four commercial properties and a parking garage, and has 10 properties it is readying for development-or redevelopment, in the case of Pan Am Plaza in downtown Indianapolis.
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