2023-06-23 08:10:00 ET
Summary
- Kite Realty Group is a good investment option due to its strong tenant demand, high occupancy rates, and robust same-store NOI growth.
- The company has a diverse tenant base, mostly comprising e-commerce resistant and omnichannel brands, and a strong balance sheet.
- KRG is currently undervalued, making it an attractive option for patient value investors looking for income and potentially strong total returns.
Real estate investments remain one of the top ways for everyday investors to accumulate wealth over time, no matter how consumer tastes and preferences change.
While a number of REITs have been beaten down in price over the past year due to the prospect of higher interest rates, I believe patient investors should be rewarded on the other side. That’s because in most cases around the world, prices for goods and services generally only go up over the long term, while interest rates fluctuate up and down.
This brings me to Kite Realty Group ( KRG ), which I last covered here in April, noting respectable NOI growth and strong tenant demand for its properties. In this article, I provide an update and discuss why KRG remains a good bargain for income and potentially strong gains.
Why KRG?
Kite Realty Group is a self-managed shopping center and mixed-use REIT that owns a sizable portfolio of 183 properties covering neatly 26 million gross leasable square feet across the U.S.
Unlike well-known peers Federal Realty Trust ( FRT ) and Kimco Realty ( KIM ), which are more coastal focused, KRG is concentrated around the lower cost and growing Sunbelt region, from which it derives 67% of its annualized base rent. As shown below, Texas, Florida, and North Carolina are among KRG’s top 5 states and make up 43% of total ABR.
KRG also carries a diverse tenant base that is mostly comprised of e-commerce resistant and omnichannel brands. KRG attracts well-known tenants such as TJX Companies ( TJX ), Best Buy ( BBY ), Publix, and Ulta Beauty ( ULTA ), which are among its top 10 tenants. Importantly, KRG is attracting a good number of high consumer appeal from small shops, which pay higher rent per square foot compared to anchor tenants.
As shown below, 100% of KRG’s small top 50 small shop tenants are national brands that make up 15 % of portfolio ABR and includes Nike ( NKE ), YETI, Verizon ( VZ ), and Starbucks ( SBUX ).
Meanwhile, KRG enjoys strong occupancy of 97% for anchor tenants and 90% for small shops, sitting comfortably above the 85% that’s generally considered to be good. Impressively, KRG saw robust 6.5% YoY same-store NOI growth during the first quarter. This was driven by robust tenant demand, with blended cash spreads (on new and renewal leases) of 21%. Tenant retention was also well-above historical norms at nearly 90%.
Potential headwinds include KRG’s exposure to Bed Bath & Beyond, which represents 22 stores and 1.4% of ABR. However, this isn’t the first time that KRG has dealt with a troubled tenant as the retail space is always evolving, with the only permanency being the underlying land. Management expressed confidence in being able to re-lease BBBY’s properties during the recent conference call :
Open air retail will always be Darwinian, and tenants that are slow to adapt will be nudged-decide by more agile competitors. It's what makes our business so dynamic and interesting. We've been through this exercise before. And as it relates to Bed Bath or any struggling tenant, we'll gladly trade any temporary disruption for the long-term value creation associated with re-letting these spaces to vibrant and traffic-generating tenants.
The good news is that Bed Bath boxes are attractively sized and located in prime spots within our centers, which we expect will translate into healthy re-leasing spreads and strong returns on capital. Currently, we have significant interest in our locations from a variety of categories, including specialty grocery, discount, sporting goods and home furnishing.
Meanwhile, KRG carries a strong balance sheet with investment grade credit ratings from S&P, Moody’s, and Fitch of BBB-/Baa3/BBB. It also has $1 billion of liquidity with a low net debt + preferred / EBITDA ratio of 5.3x, debt service coverage ratio of 5.2x, and 89% of its debt is fixed rate with a weighted average 4.4% interest rate.
While KRG isn’t the highest yielding name in its space, the dividend is well-covered by a 49% payout ratio, based on the midpoint of management’s FFO/share guidance of $1.95 for the full year.
Lastly, I find KRG to be attractively valued at the current price of $20.89 with a forward P/FFO of 10.7. This appears to be too cheap for a company that’s seeing strong tenant demand and respectable SSNOI growth. As such, I don’t think it’s unreasonable for KRG to trade at a 12.5x P/FFO, which could result in potentially strong double-digit total returns in the near term.
Investor Takeaway
Kite Realty Group remains an attractive option for income and potentially strong total returns in the near term. The company is enjoying robust tenant demand with blended cash spreads of 21%, strong same-store NOI growth, and high occupancy rates. Lastly, it appears the market isn't giving KRG credit for its strong balance sheet. As such, patient value investors ought to give KRG a look at its current discounted level.
For further details see:
Kite Realty: Undervalued And Underappreciated