Kite Realty Group's 7.9%-Yielding Dividend Is Attractive

|
About: Kite Realty Group Trust (KRG)
by: Ploutos Investing
Summary

Kite Realty Group has a portfolio of retail properties located mostly in the top 50 markets in the U.S.

Its retail portfolio should be more resilient to the rise of e-commerce than many other retail REITs as its tenants are mostly service-based or grocery-anchored tenants.

KRG's properties are mostly located in markets with above-average population growth rates.

The company’s 7.9%-yielding dividend is attractive.

Investment Thesis

Kite Realty Group (KRG) delivered a good quarter as the company saw improvements in several of its key operating metrics. The company has a quality portfolio located in markets with favorable demographic trends. In addition, its portfolio of properties is generally more resilient to the rise of e-commerce. KRG also has a strong balance sheet that should help to support its development and redevelopment projects. The company pays an attractive 7.9%-yielding dividend. It is also trading at a significant discount to its peers. We believe investors with a long-term investment horizon will be rewarded.

Chart

Source: Data by YCharts

Recent Developments: Q2 2019 Financial Highlights

KRG delivered a good quarter with same property net operating income (SPNOI) growth of 1.7% year over year. Its SPNOI year to date was 1.8%. KBR improved its retail leased percentage by 10 basis points to 95.1%. The company also increased its annualized base rent by $0.19 per square foot to $17.35. In the past quarter, the company also sold 8 non-core assets for a total of $244 million. The disposition program was ahead of its schedule. Therefore, the company had to lower its 2019 funds from operations guidance by $0.06 per share due to temporary dilution. It now expects to generate FFO of $1.61-$1.69 per share.

What we like about Kite Realty Group

A portfolio of properties in higher population growth markets

KRG has a portfolio of retail properties mostly located in major markets in the United States. In fact, 79% of its ABR are from top 50 metropolitan statistical areas in the U.S. As can be seen from the chart below, most of its markets are also located in the U.S. Sunbelt region where population growth rates in these states have exceeded the national average.

Source: Q2 2019 Investor Presentation

As can be seen from the table below, except New York, all of its major markets have higher projected population growth rates than the national average. Similarly, average household incomes in most of its major markets are much higher than the national average of $79.96 thousand. The above average population growth rates and higher household income should continue to support retail activities in these major markets.

5-year annual projected population growth rate

Average Household Income

Las Vegas

1.4%

$80,162

Dallas/Fort Worth/Houston

1.7%

$102,448

Charlotte/Raleigh

1.5%

$104,060

Naples

1.9%

$96,071

Indianapolis

1.0%

$100,934

New York

0.2%

$141,876

National Average

0.7%

$79,955

Source: PwC Emerging Trends in Real Estate 2019

Diversified tenants that have strong credit ratings

KRG has a diversified tenant base. As can be seen from the table below, its top 10 tenants only represent about 17.8% of its total portfolio. About half of the top 10 tenants that are rated by credit rating agencies have investment grade credit ratings.

Source: Q2 2019 Investor Presentation

Several development/future opportunities

KRG has one active development project in South Bend Indiana. This project is expected to reach projected stabilization by the end of 2020 and will result in new total gross leasable area of 530 thousand square feet. The company also has several expansion and initiatives (e.g., re-tenanting) that is expected to cost about $35.96 million (see table below).

Source: Q2 2019 Supplemental

KRG also has 3 future development opportunities that are in initial planning stage. These opportunities are all located in Indianapolis. We expect management to share more details as time unfolds.

Location

Description

Hamilton Crossing Centre

Indianapolis, IN

Creation of a mixed-use (office, retail, and multi-family development).

The Corner

Indianapolis, IN

Creation of a mixed-use (retail, and multi-family development).

Glendale Town Center

Indianapolis, IN

Repositioning vacant anchor box with several national tenants. Addition of multi-family development.

Source: Created by author; Q2 2019 Supplemental

E-commerce resilient tenants

We like the fact that over 71% of KRG's ABR is from centers with grocery stores. Having grocery stores in its retail centers is a big plus because people still prefer shopping groceries at grocery shops instead of buying it online. In addition, these grocery stores also help draw shoppers to its retail centers. Hence, its other tenants will benefit as well. Besides having grocery stores, KRG also has a portfolio of mostly e-commerce resilient tenants. For example, restaurants and services tenants made up 17.2% and 25.1% of its ABR respectively. These are tenants that should continue to thrive even with the rise of e-commerce. Together with its grocery tenants, these three categories made up more than 57% of its total ABR.

Source: Q2 2019 Investor Presentation

Investment grade balance sheet

KRG has an investment grade balance sheet with credit ratings of Baa3 stable (Moody's) and BBB-stable (S&P). The company's net debt to EBITDA ratio of 6x is comparable to its peers. As can be seen from the chart below, the company has no debt maturing before 2022. Its current line of credit can also pay 100% of maturities through 2025. KRG's strong balance sheet should allow it to pursue any opportunistic acquisitions as well as development projects.

Source: Q2 2019 Investor Presentation

Risks and Challenges

Supply and demand risk

Although KRG's portfolio may be more resilient than other retail properties, the rise of e-commerce will still result in lots of vacant retail properties in the market. In many instances, property owners do not need a lot of investments in order to re-lease these vacant spaces. Therefore, supply will continue to outpace demand. This will make it difficult for KRG to raise its rental rates.

Economic recession

If an economic recession happens, consumer confidence will drop and this may result in lower consumer spending. There might be more store closures, and this will eventually result in lower occupancy. In such an environment, it will be difficult to raise rental rates.

Valuation

KRG expects to generate FFO of $1.61-$1.69 per share in 2019. Using the midpoint of its guidance, KRG is trading at a price to estimated 2019 FFO ratio of 9.7x. This is significantly lower than many of its peers who trades above 12x.

Dividend Analysis

KRG currently pays a quarterly dividend of $0.318 per share. This is equivalent to a dividend yield of nearly 7.9%. As can be seen from the chart below, its current dividend yield is toward the high end of its yield range since 2011.

Chart

Source: Data by YCharts

Investor Takeaway

We like KRG's portfolio as most of its retail properties are located in markets with above national average population growth rates. Its shares are currently trading at an attractive valuation. The company also pays an attractive 7.9%-yielding dividend. We think long-term investors will be rewarded. If there is a pullback, it will provide an even much better risk/reward profile.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.