Investors define risk in many ways. For some, it means a permanent loss of capital. For others, it means higher volatility, a reduction in the dividend, or below-market returns. Because investors have different definitions of risk, what seems risky to one might not appear that way to another.
Because risk is relevant, we'll explore the question of whether Kite Realty Trust (NYSE: KRG) is risky from a few different angles. That should help investors answer this question for themselves based on how they view risk.
Kite Realty's risk factors
Kite Realty is a real estate investment trust (REIT) focused on owning retail properties. That factor alone makes it riskier than other REITs because the sector is facing some significant headwinds. The pandemic accelerated the shift towards e-commerce while negatively impacting other retailers like restaurants, entertainment providers, and service-related tenants. That's impacting their sales, making it harder for these physical retailers to survive. Because of that, many are closing locations, which has put pressure on retail centers' rental and occupancy rates.
Along those same lines is the quality of Kite's tenant base. Overall, Kite gets 17.7% of its annual base rent (ABR) from its 10 largest tenants. Only two of these tenants have investment-grade credit ratings, implying that the others are at higher risk of not meeting their financial obligations like paying rent during an economic downturn. Further, more than 70% of its ABR comes from retailers that operate in economically sensitive industries like restaurants, fitness, theaters, and other nonessential retail and services. Because of that, if market conditions deteriorate, they might not pay their rent and could close locations.
Another risk factor for Kite Realty is its balance sheet. While the REIT does have an investment-grade credit rating, it's at the bottom rung. That puts it at risk of falling into junk-rated territory if its financials deteriorate any further. That's why the company has been slowly selling off properties since its 2014 merger with fellow retail REIT Inland Diversified Real Estate Trust to reduce its debt. For example, it sold 16 outparcel ground leases this year for $40.3 million.
What Kite is doing to mitigate risk
While retail is a riskier sector than other property types, Kite Realty focuses on owning lower-risk grocery-anchored open-air shopping centers. Overall, 75% of its ABR comes from assets with a grocery component. These essential retailers are immune to disruption from e-commerce. Because of that they generate steady sales, bringing traffic into the centers, benefitting its other tenants.
Another aspect of Kite's risk reduction strategy is to focus on owning shopping centers in markets across the Sun Belt region and Western U.S. These warmer and cheaper markets benefit from steady population growth, driving more traffic into its retail locations. Overall, 78% of its ABR comes from these warmer, cheaper markets. That's a much higher percentage than its closest peer, which gets less than 50% from similar markets.
Also, the retail REIT is working to shore up its financial profile by selling noncore properties. That's not only reducing debt but also giving it the financial flexibility to invest in redevelopment projects to improve the occupancy and income of some of its retail centers. For example, it formed a joint venture with a third-party developer to turn a former parking field at one shopping center into 267 multifamily units. It's also redeveloping vacant former anchor stores into space suitable for new tenants, including retailers, theaters, and restaurants.
Kite Realty is working hard to reduce risk
Kite Realty is riskier than many other REITs because it focuses on owning retail properties. The fact that many of its tenants have weak balance sheets and are in economically sensitive industries adds to the company's risk profile. Because of that, the REIT's rental rates and occupancy level could remain under pressure in the coming years.
However, the company is taking steps to reduce risk by focusing on fast-growing metro areas in warmer and cheaper regions while concentrating on owning centers with a grocery component. It's also shoring up its financial profile to invest in redevelopment projects that attract new tenants and income streams, demonstrating that it's working to shift its risk/reward profile in a more positive direction.