Kite Realty misses out on REIT revival

July 13, 2009

Kite Realty Group Trust has stuck pretty closely to the REIT recession playbook: Renegotiate debt, sell new shares, cut dividends, and set the development engine to idle.

Like its peers, the Indianapolis-based owner and developer of shopping centers hopes to position itself to capitalize on the downturn by snapping up distressed properties from companies with weaker balance sheets.

The company raised $88 million by selling almost 30 million new shares in May, after selling 5 million shares to net $50 million in October 2008. It also cut its dividend from 15 cents to 6 cents a share for annual savings of more than $8 million. And it is on track to save $100 million by reducing the scope of developments in its pipeline and focusing more on ground leasing and land sales.

But as the shares of most publicly traded real estate investment trusts have bounced back sharply from the lows in March, Kite’s shares have lagged. The shares recently traded at $2.75, down 37 percent year to date, compared with a 28-percent drop for the Dow Jones REIT index. They’ve been trading for below the most recent offering price of $3.20 and well below the earlier offering of about $10 per share, while most other REIT secondary offerings already are in the money.

Kite’s much larger local peers performed even better than the index. Shares in Simon Property Group Inc., the nation’s largest mall owner, are virtually unchanged in 2009 after rebounding about 100 percent from March. Duke Realty Corp. traded at $8.50 recently, down only 18 percent for 2009, after falling under $5 in March.

Kite Realty Group CEO John A. Kite calls the company’s shares “extremely undervalued.”

A variety of factors could be blamed for Kite’s relative underperformance: The shares trade for less than the $5 threshold required by many institutional investors; fewer short sellers meant less of a chance for upward momentum from a short squeeze; and the company’s stock offering was more dilutive than those of most REITs (Kite’s most recent offering roughly doubled its outstanding share count).

Kite officials are focused on a two-part plan—No. 1, to strengthen the company’s balance sheet; No. 2, to be opportunistic—and aren’t all that worried about how the fickle market values its shares, Kite CEO John A. Kite said in an interview.

“It takes time for the market to understand and see how things are going, particularly when you’re a company of our size,” Kite said. “We’ve got to talk a little bit louder.”

He points to the $130 million Kite now has available in cash and under a credit line; the company’s cash alone makes up about one-third of its roughly $95 million market value. He described the company’s shares as “extremely undervalued.”

Kite plans to use the proceeds of its stock sale to pay down a $200 million line of credit, which would give it some breathing room on debt payments of $39 million due in 2009 and $67 million in 2010. The company has a total of $700 million in debt on its portfolio of more than 50 properties with more than 10 million square feet of space.

Stephanie Krewson, an analyst with Philadelphia-based Janney Montgomery Scott, wrote in a note to investors that Kite now has ample equity, has removed any danger of breaching debt covenants, and is in a position to grow earnings.

“As a result of its successful recapitalization, we believe Kite should now garner broader investor interest and begin to trade more in line with its larger-cap shopping center REIT peers,” said Krewson, who has a “buy” rating and a $5.25 target on the company’s shares.

Michael Bilerman, a REIT analyst with New York-based Citigroup Global Markets, agrees the company’s progress to refinance some of its properties and raise additional liquidity are positives.

But in a May report, the firm classifies Kite shares as a “speculative risk” along with the rest of the REIT sector, because of continuing liquidity and credit concerns.

Kite “is particularly vulnerable to volatility of earnings due to their small size,” Bilerman wrote. “Also, because developments are a key driver of growth, any delays or cancellations could hurt KRG.”

Other risks to Kite are its concentration in low-growth Indiana and the future of Glendale Town Center after prior failures. Kite has added a Target store and transformed the property from an enclosed mall into an open-air center. Bilerman has a hold rating on the stock with a $3.50 target.

Analysts for St. Petersburg, Fla.-based Raymond James & Associates Inc. believe the company will be successful in refinancing its near-term debt, but the firm doesn’t see any catalysts to drive the shares higher soon.

A May report points to falling funds from operations, a common measure of REITs, as a concern. But the Raymond James report also points out Kite shares are trading at a 20-percent discount to their net asset value per share of about $4.

Tom McGowan, Kite’s chief operating officer, said the “pause” in new development gives the company a chance to “look inward and concentrate on core portfolio”—which is about 90-percent leased.

“As the economy changes, we feel we have the infrastructure and experience as a company to be ready to capitalize on opportunities,” he said.


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