The retail industry is facing significant headwinds. Consumers have been steadily shifting their spending to online retailers. This redirection is putting downward pressure on sales at physical retail locations, leading many retailers to shrink their footprints to boost profitability. And that has had a notable impact on retail landlords, like real estate investment trusts (REITs).
However, not all retailers are facing disruption from e-commerce. Some areas of the country are seeing a steady inflow of new people who need access to these essential retailers. That influx is leading REITs like Kite Realty Group Trust (NYSE: KRG) to focus on owning properties benefitting from these catalysts. Here's a closer look at the company.
Kite Realty Group Trust company profile
Kite Realty is a retail REIT focused on owning open-air shopping centers. The company operated 83 retail properties at the end of the first quarter of 2021, with 16.3 million square feet of space. These properties included:
- Community shopping centers: These larger centers have general merchandise or convenience-oriented offerings, often with a grocery component. Kite currently gets 58% of its annual base rent (ABR) from community shopping centers.
- Neighborhood shopping centers: These convenience-oriented centers often have a grocery component as their anchor tenant. The REIT gets 17% of its ABR from neighborhood shopping centers.
- Power centers: These centers feature category-dominant anchors, including discount, off-price, and wholesale clubs with limited small-shop tenants. Kite gets 19% of its ABR from power centers.
Kite Realty focuses on owning shopping centers in warmer, less-expensive U.S. markets across the country's Southern and Western regions, 13 of 15 overall. Its top 15 markets:
- Las Vegas: 11% of its ABR
- Indianapolis: 10%
- New York: 8%
- Raleigh, North Carolina: 8%
- Dallas-Ft. Worth: 8%
- Houston: 4%
- Naples, Florida: 4%
- Fort Lauderdale, Florida: 4%
- Oklahoma City: 4%
- Salt Lake City: 3%
- Charlotte, North Carolina: 3%
- Miami: 3%
- Port St. Lucie, Florida: 3%
- Orlando, Florida: 3%
- Tampa, Florida: 2%
Meanwhile, 78% of its total ABR comes from those markets. That's a much higher percentage than its closest peer, which gets less than 50% of its ABR from similar markets.
Kite leases space in its shopping centers to a variety of retail tenants -- about 30% of its ABR comes from essential retailers like drug stores and grocery stores. The company gets its remaining rent from restaurants (18%) and other retail and service tenants (52%) such as discount retailers. Overall, 75% of its ABR comes from shopping centers with a grocery component that drives steady traffic to these locations.
Kite Realty Group Trust news
The pandemic had a significant impact on the retail sector. Government-mandated shutdowns forced many nonessential retailers to close their doors during the early days of the pandemic, causing some to be unable to afford their rent.
In Kite's case, it experienced a 15% decline in rental collection revenue during Q2 2020, which moderated to a 7% decrease by Q4. That weighed on same-store net operating income (NOI), which fell 6.6% during the year.
Kite made several investments to enhance its retail portfolio in 2020. For example, in Q4 2020, the REIT purchased Eastgate Crossing in Chapel Hill, North Carolina, and the remaining interest in Pan Am Plaza in Indianapolis for $68 million.
The company also started three development/redevelopment projects with a total estimated cost of $12.6 million. Kite helped finance these transactions by selling one non-operated asset for $14 million and four outparcels for $7.8 million.
In early 2021, the lingering impacts of the pandemic continued to weigh on Kite's results. While the REIT collected 97% of the rent it billed in Q1, it took on $1.4 million in bad debt reserves -- about 3% of its total billing -- suggesting it might not collect this rent. As a result, same-property NOI declined by 2.9%.
During that period, the REIT also sold 16 outparcel ground leases for $40.3 million to fellow retail REIT Agree Realty Corporation and had another under contract for $1.5 million. Those sales increased its financial flexibility to reinvest the proceeds into assets with more growth potential.
At the same time, it unveiled new redevelopment projects to revitalize two of its community shopping centers, one in Delray Beach, Florida, and the other in Indianapolis.
Kite Realty Group Trust stock price
Kite Realty's strategy of focusing on grocery-anchored open-air shopping centers in the Southern and Western parts of the county hasn't paid off for investors in recent years: