SECTOR: Real Estate COMPANY: Kite Realty Group (KRG) S R. A NALYSTS : K ESHAV A GNIHOTRI AND S TEFAN B ELL S ECTOR H EAD : A SHWIN T ELEKUNTLA J R. A NALYSTS : Mariam Avila, Spencer Morris, Anand Pariikh, Austen Rabbie, Dejvi Shehu Inna Shulman, Alex Staikos
Investment Recommendation 2 CompanyKRG RecommendationBuy Current Price$4.97 1yr Target Price$6.40 % Upside28.7% Key investment drivers 1. Strategic Land Holdings 2. Advantageous Regional Spread 3. Rebounding Consumer Spending
Industry Definition Retail Real Estate Investment Trusts that engage in the acquisition, development and operation of shopping centers. These REITS have their primary operations in the continental United States and manage investment funds that own and operate numerous retail properties such as regional shopping centers, megaplex theaters, and restaurants. Revenue generation stems from leasing properties and earning management fees. 3
Industry Breakdown 4 REITS $272 Billion (100%) Retail REITS $82 Billion (30.1%) By Market Capitalization
Revenue Generation 5 Acquire properties and investments suitable for a shopping center Development Identify target occupants and build to quality Research Acquire contracts from companies to fill vacancy in shopping centers Business Sales Income received from promotional ventures Reduce vacancy rates Promoting Upgrade and expand properties for high-level occupants Upgrading Property Fees received from asset and property management accounts Receive reimbursements for common area maintenance Company Base Planned straight line rent increase over the life of the lease Rent Revenue Long Term Contracts
Kite Realty Group (KRG) Trends and Opportunities 6
Company Snapshot 7 EV$921.39M Market Cap$319.41M EBITDA$63.14M Beta1.80
Trends: Consumer Spending Purchases up 4.1% in the last 12 months 1% increase through Jan. and Feb alone Consumer Debt has fallen for 7 straight quarters Down 7% from peak in 2008 Holiday Season Sales up 5% in 2010 U.S. Unemployment at lowest since April
Trends: Diversified Big Box Anchors 9 Top performers in recessionary periods Big box stores (e.g. Wal-Mart, Target) provide long-term stability Brand recognition lures customers to smaller adjacent stores U.S. Census Bureau Ibisworld.com
Opportunities: Land Holdings Portfolio Expansion of 17.4% Depressed property values have lowered development costs 2007: $126/sq. ft. 2010: $71/sq. ft. Occupancy rate consistent at 92.5% Retail Stability rate: 90% Industry average: 87% Majority of ongoing developments are preleased 2010: 92.1% Preleased 2009: 73.1% Preleased 10 Total Portfolio GLA December, million sq. ft. March, million sq. ft.
Opportunities: Regional Breakdown (1) 11
Opportunities: Regional Breakdown (2) 12
Potential Risk: Leverage Total Debt: $670mm KRG EV/EBITDA at 13.9x CBL: 11.2x, AKR: 16.2x, RPT: 16.9x Q4 2010: Issuance of 28M common shares Proceeds of $67.5M used to pay off unsecured loans of $55M and $11M $75M of debt maturity in 2011 $37M has already been refinanced 13 Total Debt/EBITDA Q x Q x
Valuation 14 Year2011(e)2012(e)2013(e)2014(e)2015(e) FCF $109,529$124,863$141,095$155,205$167,621 DCF WACC6.93% Growth Rate4.00% DCF Value$974M 1yr Price$5.96 Comparables Multiple I (50%)P/FFO 1yr Price$7.46 Multiple II (50%)TEV/EBITDA 1yr Price$ % Weight60% Weight 1yr Target Price6.40 % Upside+28.7%
Risks & Sensitivities 15
Recommendation Key investment drivers 1. Land Holdings 2. Regional Spread 3. Consumer Spending 16 CompanyKRG RecommendationBuy Current Price$4.97 1yr Target Price$6.40 % Upside+28.7%
Questions? 17
Competitive Environment Extent of Rivalry High Barriers to Entry High Substantial Fixed Costs Power of Buyers High Large Number of Vacancies Threat of Substitutes Low/Moderate Online Shopping Catalogue Orders Power of Suppliers Low Large Number of Firms Prices Must Remain Competitive 18